The Downside of Subsidized Pricing
It’s totally clear why Apple went with subsidized pricing starting with the iPhone 3G. The psychology of spending less up front and getting dinged a bit extra every month is powerful stuff. “Look, it’s only $199!” Now, all of those that bought an iPhone 3G on a subsidized price get to meet the dark side of the deal. It’s up to your carrier to decide when you can get an update to the new iPhone 3GS at the subsidized price.
For example, I bought my iPhone 3G early on. Not the first day, but soon thereafter. AT&T, at least on the contract that I’m on, lets me get full upgrade pricing a year after the initial purchase as long as I agree to a new two year contract. Otherwise, the price is higher. For example, during the order process right now for a new iPhone 3GS, here’s what I see:
$399 for the 16GB model, huh? That’s a $200 premium if I want to be a first day buyer of the new, sexier iPhone. But, if I wait about a month till July 13th, I may qualify for a standard upgrade. I think I can hold on tight until then to save $200.
But, and let me emphasize this strongly, what I see above and what you see may vary a great deal both in the price charged as well as the date at which you may qualify for standard pricing.. Some folks on Twitter (@psyton and @morkdorison to point at a couple) are reporting that they are being told they have to wait 18 months instead of 12 in order to qualify for an upgrade. From what the fine print on the Apple site says (pointed out by @bretto), some folks might have to pay as much as $599 to get a new phone, depending on where they are in their contract.
Of course, we all agreed to the contracts and the terms. So, whining loudly isn’t exactly going to do much good. On the other hand, it should be pointed out that there is only one contract to choose from. Really, if I could have paid more when I bought my phone, paid less for the monthlies, and come out even, I would have been happy to in order to have a cleaner upgrade path. Maybe a lot of other people would have either. But that choice doesn’t really exist. Sure, you can pay for an unobligated phone, but it’s locked to AT&T and the monthly fees are the same. That option is called loosing both ways.
As an aside, and as an illustration of how ridiculous dives into the legal terms and conditions can get, here’s the fine print on the Apple iPhone comparison page:
Sure, most of that fine print is on things like battery life and speed and all. But seriously. Really? I wonder if the Palm Pre folks are about to cook up their own version of a snarky fine print add. Oh wait, they’re exclusive with Sprint. They’ll have tons of their own fine print. Never mind.
If you’re stuck way back in your contract, and in a strange twist of terms and conditions, it may be better for you to terminate a contract and sign up for a new one. @idbjorh looked into this and found his early termination fee was $125. Of course, you have to wonder if they might hold that against you when you sign back up on the same day. I’d guess you’d loose your number.
As I said, this is the dark side of those juicy subsidized prices. Boy howdy. If there was any one thing I was hoping Apple would do when they got into the mobile phone market was that they would make all of this less of a pain in the ass. That certainly didn’t happen.
Update: It’s been an interesting day talking to all sorts of people about this via Twitter, iChat/AIM, and other channels. There’s one thing that I thought was obvious, but which I want to make even more clear.
I don’t have my knickers in a twist the contract terms, per se. I knew what I was signing. I also knew that on my deal, I’d get an upgrade opportunity at twelve months like I have with my AT&T service for a while. What is annoying are the variable terms. It creates so much confusion that even the media, such as the WashingtonPost/TechCrunch article on the topic, can’t get the subtlety of the facts straight. It’s like they did what I did this morning, look up their account and assume that everyone else’s has the same terms. It’s only when you hear from lots of different people how much variability there is.
If anything, I actually think responsibility for the confusion rests with Apple who agreed to go with subsidized pricing to cut upfront costs. The low prices were well received, but it shouldn’t have been too hard to see the confusion that this would create later when you have a yearly upgrade cycle and your customers can only sign two year contracts.
14 Comments
Plus if you're on a family plan, and didn't manage your phone upgrading well, you're also in trouble.
My wife has been getting hand-me-downs for a few years, so has last used her upgrade 3+ years ago. I on the other hand got the 3G in July as well. If I had played games with her plan vs. mine, we could both upgrade to the 3GS now. Instead she's going to get to laugh at me with her shiny new phone while I wait and wait...
Reply to this comment
The "subsidies" have two big problems: they are anti-competitive, and they are bad for the environment.
None of the carriers offers postpaid plans where you give away the subsidy in exchange for lower monthly payments and no contract terms. Your only options are a 2 year contract or prepaid, the latter offering no data plans. The reason they can do this is lack of competition, stemming in no small part from the fact the carriers in the US use different standards, GSM and CDMA.
The side-effect of this is people upgrade perfectly usable phones every year or so, many of the old phones finding their way into landfill. 14 million cell phones are discarded each year in California alone. Yes, you read that right.
The other effect is it gives carriers control over cell phone distribution, along with the ability to dictate terms to manufacturers. Just one example: Verizon is notorious for crippling Bluetooth in its phones in order to force you to use the noxious and overpriced MMS service to share photos.
Hopefully the new, less lenient FCC chair will make more efforts to rein in the Cellcos practices, which would be banned outright if they happened with wireline carriers. There is no reason to treat the wireless oligopoly with kid gloves as if they were still fledgling rather than the new normal. None, apart from the huge revenues the Federal government gets from spectrum auctions, of course...
Reply to this comment
I'm also trapped in a 2-yr ATT contract (for my Blackberry) but I have to say a lot of this strikes me as excessive whining from the community.
First of all, it's not an iPhone issue - you'd be hitting the same issue if trying to switch to a Blackberry on ATT.
More importantly, we both committed last year to a 2-year contract in exchange for a carrier subsidy of at least $200 on the device we got at the time.
To complain we're not getting the fully subsidized pricing on the new iPhone now is, in essence, to complain that we're not getting a new 2-year subsidy in exchange for not completing our previous 2-year commitment that we made last year. I don't think either of us is offering to repay the subsidy we got last year as part of the deal.
At least ATT is offering a partial subsidy to us in exchange for re-upping for another 2 years. That it's about half the maximum subsidy strikes me as actually being pretty fair. And it's not often I would say that about a carrier.
Reply to this comment
Tom, indeed, we all did agree to the contracts. But, there's not really much of a choice, now is there? As I said above: "If I could have paid more when I bought my phone, paid less for the monthlies, and come out even, I would have been happy to in order to have a cleaner upgrade path."
The part that's worth whining about is that everyone seems to have a different set of constraints in their deal. Some people are getting upgrade offers after 12 months (I'm happy to be in that group), others 18 months. Some people are getting upgrade offers of $200 more. Others $400 more.
It's the vague, confusing, and seemingly random set of policies that are worth pointing out. And, for those that weren't really thinking when they entered into the contract, it is a reminder that subsidized pricing has a back end price.
Reply to this comment
Well, I'm an original EDGE iPhone user -- since August 2007 -- and I'm treated just as well as the 3G users.
I wonder how they'll handle it if I were to cancel my service the day my contract is up, and then re-up the next day? Or the same day? Would I be treated as a "new" AT&T customer?
Or will I walk across the street to Verizon?
Reply to this comment
"...the dark side of those juicy subsidized prices."
And may I add monopoly/exclusivity.
What would service prices be if I could change providers by buying a new SIM card at the newsstand?
@pr9000 I am on Verizon now... good signal, quick customer service, outdated, intentionally crippled handsets, fleecing the customer at every and any opportunity.
Reply to this comment
So let's see if I hear you right;
you signed the contract and are now mad that you're being held to it's terms?
Reply to this comment
MacDork, If your comment is directed at me, which I think it is as you didn't reference any commenter by name, no, you didn't hear me right.
I know I signed a contract. I know what the terms are. I'm fine. Read it again if you missed that part.
The issues I'm pointing out are the confusion around the variability of terms and what not. I'm pointing out that there's really no viable alternative other than to deal with the iPhone on these terms. Most of what I wanted to do with this point is pointing out the downside of what we got when the price came done.
Reply to this comment
"The part that's worth whining about is that everyone seems to have a different set of constraints in their deal."
So the complaint is that ATT is choosing to offer better-than-contracted deals to some of their customers (presumably the better ones that pay more consistently or are more profitable by some metric?)
Businesses aren't obligated to treat all customers equally, any more than every customer is equally profitable. Credit card companies don't charge everyone the same interest rate, hotels offer discounts to repeat customers, and the local bakery probably gives a few extra croissants to the lady who buys a dozen every Saturday morning.
The alternative you're suggesting is that we'd prefer if ATT simply held everyone to the original 2-year contract. I can't agree with that.
Reply to this comment
Tom, OK, maybe I misspoke a bit there. Easy to do in comments.
Obviously AT&T has a set of policies in place to help customers get new phones at better prices. I don't have a problem with those policies. In fact, I benefit quite a bit from those policies. It's because of those policies that I've stayed relatively happy with AT&T as a provider. At least more happy than with other providers.
The core of the problem here is that with subsidized pricing, things get a lot more complicated than most people are aware. Sure, they know they're signing up for a contract, but most don't read the contract nor are aware of the terms. Overall, it's a very un-Apple experience. The first generation Apple iPhone had a much better experience. You paid full price. You paid for service. Much more straightforward. Now, with the subsidy, it's very much more confusing.
That's the issue I see.
Reply to this comment
I'm sympathetic to what you're saying but I think it's hard to ask Apple (or ATT) to fight the prevailing convention in the market on this one for the very reason that consumers _don't_ tend to understand the subsidy process.
If the iPhone was selling w/o subsidy and contract, consumers would be seeing the Sprint Palm Pre at $200 (or whatever subsidized price it is) and the iPhone at $400+, and thinking that the Pre is obviously a much better deal. It just wouldn't fly with mass market consumers.
Reply to this comment
James, I'm guessing a few of your readers are like me and got a bit excited seeing your standard renewal date. We were quickly brought back to reality when our own accounts showed renewal dates in December.
I can think two explainations. First, you have a more expensive phone than most users and AT&T took this into consideration. (Which is a plus for AT&T, because I know Verizon doesn't do this.) Second, the system wasn't ready and returned back an incorrect date.
If the $699 for a 32GB iPhone 3G S wasn't locked to AT&T, I could see the paying the extra money. (It be nice to swap out the SIM, when traveling outside the US.) But since the customer is still chained to AT&T and don't get a discount on your service, you might as well get the subized phone. The only plus you have is that you can leave AT&T.
I have to say I was more disappointed AT&T will not support tethering on day one. Right now, I'm waiting for the iTouch refresh and hoping it will most of the iPhone 3G s features, but the phone features swapped for more memory.
Reply to this comment
Jeff, I'm working on my 2nd iPhone. Before that, hrm. I had a Blackberry and a few other devices. That might have something to do with it. Or maybe not. After talking with lots of people today, it seems that the distribution of 12 to 18 month eligibility terms are such that a pattern isn't clear.
If it's a mistake, well, that's where I'll be annoyed—and happy that I captured this screen.
Reply to this comment
Guys, there's really no mystery here. After 18 months, you are eligible for the same price as a new customer. After 12 months, you are eligible for what's called "early upgrade" which is usually something around a 20% discount off retail price. Some higher-level service reps have the ability to occasionally alter these terms somewhat for special occasions (say as an apology for a faulty phone), but will not make a habit of it.
This is not new, and in no way iPhone specific (though from what I understand, the ability for managers to offer special deals on iPhones is pretty limited). This is the way phone subsidies have always worked, and pretty much the standard policy for just about any US carrier (likely other countries too, but I have no specific knowledge there).
I'm really baffled as to why this has become a controversy at all since this is completely standard procedure. Maybe it's just the first time some people have had a phone that retails for $700 so the stakes are higher.
Reply to this comment
Leave a comment