New iPhone Pricing Model Is a Step Backward for Consumers

Of all the research reports written about the debut of Apple’s new $199 iPhone this week, one written by Craig Moffett of Sanford C. Bernstein was particularly notable: He warned that the cheaper iPhone is really a step back, not a step forward, for open networks.
In recent months, wireless carriers like AT&T and Verizon Wireless have made much of the notion that they are willing to embrace a more open attitude toward consumers, promising to allow them to buy full-priced mobile phones and use them on the network of their choosing. But AT&T’s decision to subsidize the iPhone but require customers to sign a two-year contract “undermines progress towards an open network future,” wrote Mr. Moffett.
In a business model where phones are subsidized, customers are locked into long-term contracts and subject to stiff penalties if they decide to switch carriers. (Wireless carriers maintain that contracts and termination fees are essential to help defray the cost of the subsidized phones.) Wireless carriers also spend billions of dollars to maintain large numbers of stores to sell phones sold solely for use on their networks. Those costs, too, are factored into the price of plans, analysts say.
Analysts estimate that AT&T will pay Apple at least a couple of hundred dollars more an iPhone than it will charge customers, according to Bloomberg News. To offset that subsidy, AT&T’s consumer data plans for the new iPhone will cost $10 extra a month than for the unsubsidized, first-generation iPhone, which is available for as low as $399. The new iPhone’s contract terms are also less forgiving if consumers want to upgrade to a next-generation iPhone before their contracts end.

“Like promotions and discounts in so many industries, the short-term revenue and share boost of the old and familiar subsidy model is like a drug,” wrote Mr. Moffett. “The downside is that we are now right back where we were before, in a world where customers expect carriers to underwrite device costs, and where carriers therefore maintain the high costs of retailing as well as network operations.”
Despite the new-era hype, Mr. Moffett wrote, “the philosophy of the new iPhone is ‘business as usual.’”

http://bits.blogs.nytimes.com/2008/06/11/new-iphone-pricing-model-is-a-step-backward-for-consumers/index.html