AT&T Upgraders Ignore Subsidy iPhonomics
Thursday, June 11th, 2009
By Ross Rubin, Executive Director, Industry Analysis
Apple’s forthcoming iPhone 3G S may have twice the speed and, at its 32 GB size, twice the capacity of today’s high-end iPhone 3G, but it is also at least twice the price now that the 8 GB iPhone 3G will drop to a mere $99. Of course, that’s with a new contract and a two-year commitment to stay with AT&T.
When the iPhone 3G was launched, AT&T could justify deep discounts for upgraders because it wasn’t losing any money on subsidizing the first iPhone. Now, though, iPhone 3G users are complaining that AT&T is charging $300 or more to upgrade to the iPhone 3G S. The problem for early adopters is straightforward. Contracts are on a two-year cycle but the iPhone is on an annual upgrade cycle so AT&T can’t recoup its subsidy fast enough. And of course other handsets that keep pushing the leading edge are becoming available all the time. It is certain that today’s hot Palm Pre will look less alluring two years from now as Palm releases models with more features.
The cell phone subsidization model is outstanding for getting leading edge technology into consumers’ hands, but it has no easy way to keep early adopters there for the term of the contract. What the plaintiffs ignore, though, is that if they had bought a similar high-tech device without a contract, they would have paid a much higher relative price for the first purchase and the upgrade were it not for the carrier subsidization model that makes the upgrade look relatively expensive. Consumers who see value in the enhanced performance of the iPhone 3G should take advantage of the discount, even if it’s not as attractive as one that rewards a switcher.
Over at Technologizer, Harry McCracken proposes an interesting option; simply extend the contract for the full length of both contracts to offer the lowest price to existing customers. That, though, sacrifices the savings on customer acquisition when selling into the installed base and sets up potential for indentured servitude-like contract terms. Another option would be an additional fee — almost like obsolescence insurance — that offers more flexibility on trade-up frequency, but it’s hard to see how the economics of that would make it worthwhile. Regardless of the extent of subsidization, those who live on the bleeding edge bleed green.
Wireless | Ross Rubin, Executive Director, Industry Analysis | 
June 11, 2009 9:19 am
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