On Subsidization: AT&T is Not Ripping Off iPhone 3G Owners


There is already a lot of noise over this all around the ‘net. Owners of the iPhone 3G saying they’re getting ripped off, or not being treated like “loyal customers,” because they’re not being offered the fully subsidized price for the new iPhone (s aapl) 3G S. In reality the AT&T (s t) upgrade pricing is pretty much like all phone subsidies in the U.S. (and, for that matter, many other parts of the world). Actually, it’s a little better.

The unsubsidized price of the iPhone 3G and S models is $599/$699. The ones complaining most are iPhone 3G buyers who bought it for $199 shortly after its launch last July. Even then, they’ve only had the phone for 11 months. They have less than one year completed on a two-year contract. At best, they’ve only “earned back” half the $400 subsidy, yet they somehow feel entitled to it all, as if AT&T should just swallow the remaining $200.

For all the complaints about being ripped off, the truth is AT&T is actually being pretty good about this. When 3G owners have a year under their belt, AT&T is willing to say, “You owe us another year of subsidy ($200), but if you ink a new 2-year contract for the 3G S we’ll provide you the second year’s subsidy ($200).” That’s why 3G owners are being offered the new models at $399/$499 when they hit their 1-year anniversary.

Why do I call the above “pretty good”? Because typically you have to go 18 months or more before a carrier is willing to provide a subsidy for a new purchase. That AT&T is willing to do so at 12 months is about as “generous” as a U.S. carrier gets. Yes, it’s only half the subsidy, but you only completed half the time on your current phone.

I’m not asking you to agree with the subsidized sales model, or be happy about it. Nor am I trying to convince you it’s good — none of that is the point. The point is it’s the model we have, and a 3G owner is not paying extra or getting ripped off because of it. Do the math. If you bought the 3G at $199, and one year later bought a new 3G S at $399, at the end of that new 2-year contract you’d have paid $600 for both phones, and received $600 in subsidies. That amounts to $200 in subsidy for each year, which is exactly what AT&T offered you in the first place (and what you agreed to).

What’s strange about all this is that, even though this upgrade maze exists with all carriers, only Apple makes a phone so compelling people want to get a new one after only a year, so the upgrade policy is getting the spotlight on it and grabbing all this attention. Maybe the outcry will compel some changes in it, though it’d likely require all the carriers to come on board for it to work.

Meanwhile, this is generally the way it is for any heavily subsidized phone on any carrier. If someone buying a Palm Pre (s palm) or BlackBerry Storm (s rimm) with full subsidy today thinks they can get that same full subsidy on a newer model before putting most of their time in, they’re kidding themselves.