Why AT&T may subsidize Apple’s iPhone

“Although it has sent millions of new customers AT&T’s way, this unique market advantage known as the iPhone will only last so long. With every passing month, rival device makers are introducing new handhelds that attempt to replicate the wide array of innovations—starting with sheer simplicity—that Apple used to rock the wireless world less than a year ago. None of these new phones has duplicated Apple’s formula for success yet, but it may be only a matter of time,” Arik Hesseldahl writes for BusinessWeek.

MacDailyNews Take: If by “duplicate Apple’s formula for success,” Hesseldahl means, “violate some or all of Apple’s 200+ iPhone-related patents which CEO Steve Jobs has vowed to vigorously defend,” then he’d be correct. Of course, then it’d “be only a matter of time” until Apple’s would-be iPhone fakers get to start dealing with lawyers, lawsuits, and courtrooms, rather than trying to peddle their iPhone knock-offs to the ignorant.

Hesseldahl continues, “Published reports that first appeared on the Web site of Fortune Magazine suggest that AT&T, which has an exclusive five-year deal to sell the iPhone in the U.S., is prepared to subsidize the device by as much as $200, slicing the purchase price as low as $199 for customers who sign a two-year service contract… Such a discount could cause a surge in demand. At last count, Apple had sold some 5.4 million units, the vast majority of them for AT&T’s network, even with price tags of $400 to $600—essentially unheard of in the U.S. cellular market. Impressively, AT&T says 40% of its iPhone users are new customers.”

“But a price cut might be about more than nabbing new customers. AT&T’s goal may also be to boost monthly revenues from existing subscribers who switch to the iPhone, as the big colorful screen and robust Web browser on the Apple device tends to make iPhone owners heavier users of AT&T’s wireless data services,” Hesseldahl reports.

“There’s also been speculation, considered unlikely, that AT&T might be floating the idea of an iPhone subsidy to reinforce its marriage with a partner as notoriously slippery and heavy-handed as Apple,” Hesseldahl reports. “Some have suggested, for example, that Apple might try to argue that the new iPhone isn’t covered by the exclusive rights given AT&T for the first edition, and thus walk away from AT&T.”

More in the full article here.


  1. Has anyone actually seen Apple & AT&T;’s contract? Has it really been reported on in the media (or just speculated on). During the past year, major media outlets have reported numerous times that Apple’s iPhone agreement with AT&T;is for five years, but has any reporter actually ever seen this agreement? Do we know it’s really for five years? I believe the Motorola RAZR initially was AT&T;only, and I think it was for one year only.

  2. Just testing the water… Apple is just testing the water with iPhone 1.0

    Anything can happen with iPhone 2.0:
    – multiple models
    – iPhone subsidy
    – unlocked models
    – multiple carriers
    – GPS
    – 3G
    – and the unexpected…

  3. Trying to duplicate the iPhones success is not going to be an easy task. Sure, companies could duplicate the hardware, but would probably be in violation of patents.

    Then the software… Good luck starting from scratch and trying to develop something like OS X. And again, try doing it without violating patents.

    Good luck!

  4. “If by “duplicate Apple’s formula for success,” Hesseldahl means, “violate some or all of Apple’s 200+ iPhone-related patents which CEO Steve Jobs has vowed to vigorously defend,” then he’d be correct.”

    Yeah, well what about the 1000s of cell phone patents Apple is probably stepping on with their iPhone?

  5. “notoriously slippery and heavy-handed”? Uh, Arik, we are talking about Apple, not MicroSoft. The record shows that Apple abides by its agreements, doesn’t destroy partners, and delivers what it promises. The record for MS shows somewhat different behavior. It bugs me when people try to smear Apple just because they are hurting over the revelations of their preferred company.

  6. Given Apple’s track record of introducing new iPod/Mac models about every year, and given how mobile phones change quickly, I highly doubt that AT&T;would have agreed to a 5 year contract (or multi-year, as SJ stated) which only covered the initial iPhone.

    Apple may have some kind of buyout clause, but let’s be real here too – most of the world is GSM, not CDMA, and producing a CDMA iPhone would increase production costs. If Apple isn’t getting revenue from Verizon Wireless or Sprint, then the incentive is not really there to produce a phone which works on a different network.

    That’s Apple’s leverage, with Verizon Wireless, Sprint and AT&T;.

  7. I was under the assumption that AT&T;was already subsidizing the iPhone. Since they are the exclusive US carrier, that would be transparent to the customer, anyway. Isn’t that why in the countries where Apple is required to sell it unlocked, they charge a premium?

  8. You know, little man kinda has a point there. Isn’t the revenue sharing agreement, especially when you look at the price of an unlocked iPhone in France, basically the same thing as subsidizing? They’re knocking off something like 400 bucks from that phone, and that money (obviously not quite that much) is going to Apple. So, in a sense, AT&T;is subsidizing the iPhone already.

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