Blog Post

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.

62 Responses to “On Subsidization: AT&T is Not Ripping Off iPhone 3G Owners”

  1. kijubi

    @Tom – I purchased the phone online and did not obtain an AT&T contract right away. I had to wait for my other account with T-Mobile to end before I could setup the AT&T account. So, I did not use any of the subsidization (is that a word?). Now they are telling me I can get the new iPhone 3G S for $499 (32gb), and eligible for a full upgrade on June 29th. Apple says the full upgrade grants me the right to purchase for $299 but AT&T says it will still be $499. A bit of confusion between the companies is all I can see.

  2. Salemander

    You are saying the “outcry” may change things, but then you are criticizing people for making an outcry (i.e. all cellphone users pay the same high fees, so suck it up). The only way a carrier is going to change what it charges is if people start refusing to pay them altogether. And given that the crackberry generation will then have no way to get their fix, what are the chances? [Can you say ‘tacit collusion’ boys and girls? Nice try]

  3. Read the contract before you agree to the terms. To call it a rip off means that AT&T violated the terms of the contract you both agreed to. Did they? Seems the whiners want to get out of their contract terms.

  4. I feel like I deserve the subsidized price after purchasing my 3G phone in July because even though AT&T subsidized the phone, how much do these companies make from TXT messaging plans? Not only that, you still are renewing a two year contract. I think all the carriers are shiesters. That’s just me though.

  5. Tom – I’m not trying to drag Apple into it. But it’s poor brand and expectation management to wave a piece of meat around in front of a bunch of hungry dogs telling them how awesome it’s going to taste, then tell them that they can’t have it for six months. And they dragged ATT into it themselves by announcing pricing at $199 and $299. That’s not the price, that’s the ATT subsidized price, which we all assumed we’d be paying.

  6. Ryan,

    I don’t see it that way. In my article your “full price” and my “unsubsidized price” are the same.

    What you call unsubsidized in my opinion IS subsidized, to the tune of $200, as I explained.

    Finally, there’s what I called “fully subsidized”, which is the $400 subsidy that brings the phones to their advertised prices of $199/$299.

  7. Steve,

    Dragging Apple into this in my opinion makes zero sense. It’s be like yelling at RIM to get better subsidies on their Verizon offerings. It won’t help. Or yelling at AT&T to get iPhone OS bugs fixed quicker. Each company has their role to play and what they’re responsible for. The subsidy game is the domain of the carrier (as is MMS and tethering, for that matter). Apple could plead, beg, and cajole (maybe they are), but the fact is it’s the carrier’s decision.

    As for the price, the asterisks are there for a reason. Again, not saying I like it (or that you should), but it is what it is.

    • Apple is guilty of false-advertising.
      The only price they tell you is the price you expect to pay. This is WORSE than bait-and-switch, where one product is advertised and another of higher price is substituted for it when you go to the store to buy it. The real price is more than DOUBLE the ADVERTISED price! That is FRAUD! I did not pay ANY extra cost the last time I upgraded, they just started a new 2-year contract, when I was not through the old one. I got ripped off by paying $200 extra the first time around, on the original iPhone, when they dropped the price by $200 a month after I bought mine. I got the $100 refund (I’m still out $100) from Steve Jobs, but he’s probably not going to do that again this time, he’s probably dead already, has anybody seen him lately? He’s with Elvis. He’s left the building. We ARE being ripped off, I won’t buy the 3Gs, not now, probably not ever! I had to select the 5% gray text on the white background in order to read the “fine print”, but that doesn’t change the fact that Apple has repeatedly MIS-LED us about the price as much as possible. I’ll never stand in line for an iPhone again. I’m getting that Verizon thing when my contract is up.
      If you have a first-gen iPhone, it’s not worth anything anymore. Let’s bring them to the AT&T store and smash them on the ground in front of the stores! Do it when the TV cameras are rolling, all at once. Let’s picket them! Hack the Planet! Hack the Planet!

  8. Ryan Burke

    Correction, there’s “full price” and there was “unsubsidized”. Here’s the lo-down:

    Full Price (w/ no contract, as of March 09)
    8GB iPhone 3G for $599
    16GB iPhone 3G for $699

    Unsubsidised (you didn’t qualify, early upg)
    8GB iPhone 3G for $399
    16GB iPhone for $499

  9. Ryan Burke

    Uh, whoever paid full price for an iPhone last year AND ended up under a contract for scammed, and probably did not buy the phone at AT&T (owned) or Apple. Full price phones were for no contract, and I think that was offered March of this year.

    I don’t see what the fuss is about. All you have to do is go to an AT&T (owned) store, if you bought the phone at Full Price w/ No contract, and they’ll gladly sell you one with a contract for the subsidized price… But know that you have 18 mo. before you can upg. your phone.

  10. So maybe Apple could have mentioned it during their keynote, so we didn’t all get so excited and then totally let down. I’d bet most if not nearly all keynote viewers at WWDC have a 3G and got built up then deflated. Poor management of expectations.

  11. Why are people acting like their 3G will just disappear in a puff of smoke the second they buy a 3GS? There is a healthy market for 3G phones out there… hell, I’m expecting to sell my Original iPhone and almost pay for my 32GB 3GS Subsidized price…

  12. @Tom – I think Principle has the right of it. The re-up window to be eligible for a new subsidy can vary from 18-22 months. My personal account comes up at 20 months but some might have more or less time to wait it appears.

    I absolutely agree with you on the basic premise that you have to fulfill the contract to be eligible for another subsidy. No rip off.

  13. frozen

    Joey it doesn`t really matter, because the only “forced” plans were those for the iPhone. I don`t realy know what their subsidy percentage is but let`s say i buy a 200 euro phone and get a 2 year contract, the subsidy cuts the phone price in half but the contract is 3 euro plus VAT a month, and in 12 months i will be eligible to buy a new phone even though i haven`t completed the contract for the first one.
    I don`t really know how they plan it but they allow you to buy a subsidized phone at a “thank you” price as part of their recognition of being an Orange client at 12 month intervals. My girlfriend bought 2 subsidized phones at about 14 months apart, both of them had their prices cut by more than half.

  14. @Principle – AT&T used to offer 1 year contract pricing, but now everything is 2 year contract pricing. There may be some deals in the retail stores for 1 year contract pricing (it seems like I remember seeing this, but I’m not gonna drive to the store to check). The iPhone is only available with a 2 year contract (and always has been). The 18-22 month re-up window (my personal contract is 20 months) is a reward for loyal customers. AT&T has discretion to REDUCE the time before you are eligible for another subsidy depending on how much you spend, etc. What’s wrong or unfair about that?

  15. Wait, if someone bought the 3G at full price, then why are they still in a contract? I thought the contract was to fulfill the subsidized price. If you paid the full $600 or whatever for a 3G, shouldn’t you NOT be in a contract? Or am I missing something?

  16. Weldon,

    “AT&T makes you eligible for a new subsidy at 20 months into a 24 month contract”

    Thanks for the update; I’d seen some people say it was 18 months. The point is that to get FULL subsidized pricing you need to be well into the 24 month term; simply being at the half-way mark isn’t enough (nor should it be). Still, giving you half the subsidy when you’re half-way through isn’t a bad deal. You lose nothing, hence my contention that there’s no rip-off.

  17. Actually, it’s not a year. At least not for me. It’s 18 months. Or perhaps it’s based on when my wife got her iPhone added to the plan.

    Lyman, and kijubi: how did you pay full price? Did you actually pay $500 or $600 instead of the $199 or $299 subsidized price?

  18. Principle

    Okay they policy from AT&T was always one year then you were eligible for an upgrade…I purchased my 3g on release day so after July 11 I should be eligible correct? WRONG AT&T has changed it’s policy to show that you are eligile somewhere in between 18 – 22 months so that they can charge us more for the new 3gS….The 18 – 22 month was quoted to me by multiple AT&T associates and they stated “it is up to us when you are eligible” not any other reason whether you paid full price or not! SO YES THEY ARE RIPPING PEOPLE OFF. I would be 100% okay with the 1 year eligibility policy but the policy of “we choose when you can” is just wrong they use that to flex dates around releases to get people to pay full price and still lock them into a full 2 year contract.

  19. Lyman, kijubi,

    There are always exceptions, and I don’t know what they may be in your case. As a start, did you pay full price because you were not eligible for a subsidy then? Maybe you still aren’t for some reason.

    What I outlined in the article is what I’ve seen expressed, and as I understand it. Lots of people — even those complaining — have confirmed this. But there will always be exceptions because other conditions can apply (passing a credit check, being a customer in “good standing”, etc.).

  20. @Layman & @kijubi – how is that you paid full price and are still not eligible for a subsidy?

    And one point of clarification to the article. AT&T makes you eligible for a new subsidy at 20 months into a 24 month contract, so you can renew before the contract is up. This is the case at least on my family plan with 5 lines.

  21. The only people that are getting ripped off is the ones that purchased the 3G at full price and still are under the 2 year agreement. Those details will probably be worked out store by store.

    The people who purchased the 3G at the “subsidized” price are getting a fair trade at the 12 month mark. They think the iPhone is different than any other new phone model any manufacturer comes out with. It’s not, your bound to the same exact contract rules as someone buying any phone from AT&T or nearly any of the major wireless carriers (Sprint, Verizon, T-mobile) ALL have restrictions on how early you can upgrade if you did not pay full price for a phone.

    The people that can’t afford the iPhone in the first place are the first to kick and scream because likely they won’t get mom and dad to pay for the new phone and they will not be the “cool kid” anymore. Welcome to reality boys and girls.

    People expecting others to bail them out when they want something they can’t afford… oh wait that pretty much describes our economy. Cars, homes, electronics (max’d CC’s) buying things we cannot afford and then crying about it because we we never could afford what was purchased. Start a petition to Obama.. maybe he will bail you out too!

  22. Joeypk07

    Frozen, but are your subsidies the exact same as AT&Ts? i.e., is Orange subsidizing approx 2/3 the purchase price? Or is it possible they make more on the back end with higher data/rate fees? It’s a little difficult to compare directly especially with exchange rates etc.

  23. frozen

    Well actually AT&T is ripping people off if you ask me. I live in Romania and i have and Orange contract. If you buy a phone with a 2 year contract and get that phone at a subsidized price, you are allowed to buy another subsidized phone after 12 months have passed without having to pay any extra money for it except the subsidized price for the new phone.

  24. the only issue I have with this is that I didn’t get it subsidized last year, I paid full price, and they are still wanting to hit me with that again, instead of even a slight upgrade price.