iPhone 3G and the Problem with AT&T’s “Subsidy”

I'm the sucker who just over a year ago got up at 5AM to sit in a line until 6PM to buy an iPhone. There are a lot of people like me, I met many of them in line that long day. It was actually a lot of fun, but had I known that if I had just shown up at the Apple Store at 7PM that night, I could have walked out with the same iPhone, since there was plenty of supply, I think I would have done the latter. Since June 29, 2007, I have been incredibly in love with this new computing platform called the iPhone, and I've written about it a bit before.

This Friday, we have the new iPhone 3G arriving in stores across the world. No longer will foreigners have to buy a hacked iPhone on the gray market. What we have been hearing reports of is the varied costs of service in each market, and sometimes between competitors in a market. That's good in general--the competition I mean. All of the talk and the new pricing scheme is making me question whether or not to upgrade in a few days, and like others, my answer is leaning towards "no". It's not because I'm not dying for the GPS and 3G capability of the device, it's because of the inflated costs of service.

Just over a year ago and even grandfathered-in today, AT&T's iPhone service has provided varying costs for buckets of voice minutes, then $20 for unlimited data and 200 SMS messages (including both send and receive messages), and oh, you had to pay full price for the unsubsidized iPhone, which when I purchased it was $600. I didn't complain about that high up-front cost because I saved up for the iPhone and really use it as my personal computer. Additionally, for my family plan, I actually saved money on the monthly deal as the $20 unlimited data was less than what I had been paying ($29 with AT&T at the time) on a regular old cell phone. There were reports that a piece of every monthly subscription fee when to Apple as part of the exclusivity arrangement with AT&T. Fine, whatever. Still, something seems fishy--I paid full price for a phone, but still there was enough money from my monthly AT&T subscription to "subsidize" Apple every month.

This time around with iPhone 3G, AT&T is subsidizing the phone up front, and Apple isn't getting kick backs from the monthly subscription. The price of data has risen $10, plus $5 for the same level of 200 SMS messages, plus a one-time fee for the privilege of being an AT&T subscriber, either $18 or 30-something depending on whether you're a new or existing subscriber. The subsidized upfront costs for the iPhones 3G are $199 for 8GB and $299 for 16GB. "Coming soon," AT&T will offer iPhones for $599 for 8GB and $699 for 16GB without contract.

It's the subsidy vs. non-subsidy pricing I'm trying to grok. If, like a year ago, I prefer to buy an iPhone out-right without subsidy, and attach it to the AT&T network, why should I pay the same price as (let alone an increased price compared to) a person who receives the subsidy? Where are these subsidy costs in the monthly subscription fees?

If you compare the monthly subscription costs to the pay-as-you-go plans, we find that the difference in costs in unlimited data are $10-- $30 with subscription, $20 without. "Well, that ten dollar difference is because one is 3G unlimited and one isn't," you may say. Nope, pay-as-you-go costs $20 regardless of whether your device is 3G or not. "Okay, that ten dollar difference is because the iPhone is a smart phone, so you're going to use the network more than a regular phone." You make a better argument this time, but I would suggest it's still wrong, if we compare iPhone and iPhone 3G. I use the hell out of the Internet on my current "old" iPhone, and I pay $20/month for unlimited non-3G Internet and 200 SMS messages, and my current iPhone is just as much a smartphone as the new iPhone 3G. Yet, with iPhone 3G, that cost increases to $30. Remember, to keep it apples to apples (sorry about the pun), we're comparing non-subsidized phones. "Well, then the cost difference is what AT&T paid Apple for your old iPhone," you may reflexively retort. Um, no, that makes no sense because that would mean that I paid full price for an unsubsidized original iPhone, Apple still got a kickback, and I still paid $10 less per month (actually $15/month less because it's $5 additional for 200 SMS remember). "$30/month is on par with other smartphones like a Blackberry or Windows Mobile phone, and for enterprise uses, the cost is an even higher price of $45/month." Okay, but just because it's now the same as other devices doesn't make it right, does it?

Something is not right here with AT&T's proclaimed subsidies. If people are paying full price for a non-subsidized phone, whether it be for the iPhone 3G, a regular phone, or a smartphone, why are we paying the same rates as those who bought subsidized phones every month? Additionally and presumably, after two years when a subscriber has "paid-off" their subsidy, why don't the user's monthly costs decrease, as the cost of the phone is no longer being paid off? Isn't it like a mortgage or a car loan, when the thing is paid off, why would you keep making the payments?

Am I missing something here?

Yes, AT&T's rates aren't as bad as some other iPhone 3G distributors in other countries, but does that mean AT&T's cost structure is fair? Maybe service providers should disclose subsidy costs in an itemized way in the subscriber's monthly bill, like they do every tiny little "cost recovery" item. As consumers, we should know what part of our subscriptions are going toward the cost of a phone subsidy. Only then can we really compare competitive services and make informed decisions.

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