AT&T’s big iPhone bet: subsidize cost of Apple’s revolutionary device, aim for long-term profit

“The new $199 price for Apple’s iPhone announced Monday is partly the result of Ralph de la Vega agreeing to foot the bill. The chief executive of AT&T Inc.’s wireless unit hopes the new phone, which AT&T will subsidize, will ring in huge profits for the telecom company down the road, even though it will hurt its earnings in the short term,” Amol Sharma reports for The Wall Street Journal.

“Mr. de le Vega worked closely with Apple Chief Executive Steve Jobs on the deal that made AT&T the exclusive U.S. provider of the iPhone, which was a smash hit in its first year. Now he’s betting the encore version with faster Web access and new features like Global Positioning System technology will maintain that momentum,” Sharma reports.

Apple’s new iPhone 3G, which begins rolling out on July 11, “will tap into the latest ‘3G’ network, which AT&T has expanded in the last year from 160 markets to 280. Download speeds on 3G reach up to 1.7 megabits per second, on average, about 10 times faster than what iPhone users had been using on the early network, but still much slower than the typical landline broadband connections,” Sharma reports.

In an interview, Mr. de la Vega stated, “It seems like $199 is the right kind of price point to get significant mass-market adoption. It’s going to impact earnings in 2008 and 2009 in a negative way, but will turn very profitable in the long term. We generate a lot of revenue from iPhone users, about twice as much as other customers. And I feel very confident that we’re going to have very low customer turnover, based on what we’ve seen from the initial version of the iPhone,” Sharma reports.

In response to a question of whwther the recent spate of iPhone lookalikes pose a threat to the new iPhone, de la Vega said, “‘I’m pretty comfortable that the iPhone will hold its own. I just think it is going to expand the market. Keep in mind less than 20% of our customers today have smartphones. I think this is going to reach people that would otherwise never put $199 into a mobile device,'” Sharma reports.

Much more in the full article here.

Charge less upfront, but it costs more over the long-term. That’s just perfect for the mentality of the average Windows PC buyer; they’ll only see the sticker price and not comprehend or just ignore the rest.

20 Comments

  1. MacNScott- I agree – the guy has vision – don’t make money off of the phone but rather off of the service agreement – those puppies are going to sell like hotcakes now…You know personally, I couldn’t justify buying a $300-$400 dollar phone but now…its cheaper then the iPod…

  2. This might be the best idea I’ve heard from a cell company ever. Sunday, a few people at work were interested, but after the price announcement (and the reveal) almost every single one of my coworkers is planning on getting an iPhone. This is a group of about 20 people and even the ones who said they would never get an iPhone (and some of them got nasty about it) are now making plans to jump ship to AT&T;. When I mentioned tv new model on Sunday, there was little interest and much Kool Aid speculation, after the Keynote, the most common sentiment was frustration over waiting until July 11.

    Looks like a winner from here…

    -M

  3. The subsidy seams unlikely as Apple has said that $199 is the maximum price for the 8 Gig phone in all of the initial 22 countries that it is initially being released on July 11.

  4. Eh, why would current owners get a different price? Apple has been sold out of the previous model for about a month now, if you bought one then you obviously didnt care about the new phone coming out and wanted one anyway.

    Im tired of hearing whinny ass people complain that they just bought something and a new model came out and they want a refund or a free upgrade. This is technology, get over it.

    At $199 the 3G is a great product at a great price regardless of what you bought before.

  5. @Chaz Mangus: I think AT&T;has said this:
    For those who bought iPhone after May 27, you can exchange your iPhone for the new one for free; end your old contract without penalty; and start a new 2-year contract for a voice plan and the data plan (minimum $30).

    For those who bought iPhone before May 27 (and no longer want to keep using it), you can buy a new iPhone for $199, end your old contract without penalty, and start a new 2-year contract for a voice plan and the data plan (minimum $30).

  6. Yeah, I would love to know what the reaction of Ballmer, Blackberry, etc. was to the $199/$299 announcement. Sure, you end up paying a little more in the long run, but the automobile industry has proven that people will jump if you keep their original out of pocket price down.

  7. 1. MDN:

    I completely agree with you about PC’s costing more over the long term, but I don’t see the relevance here.

    Basically, Apple decided to reduce their take by giving up on revenue sharing. AT&T;then turned around and took the money they were paying to Apple over the life of the contract, and applied it all at once to subsidize the device. Yes, for 2 years, they will be behind, revenue wise, but this is the standard manufacturer-carrier model.

    The only difference to the user is the device is cheaper up front, which I’m sure will drive sales through the roof. But there are no long term costs to the iPhone user, unlike the Windows PC user.

    2. I wonder how these things will be purchased after July 11 – AT&T;is essential to get the subsidized price.

    Hope this won’t mess up the Apple Store iPhone buying experience by cluttering it up with AT&T;sales stuff. Apple doesn’t seem to be saying “pay 299, 399 and then get an AT&T;credit for $200”, which would be the easy way to do this.

    Keeping a separation like this would also be a good thing to ensure a healthy unlocked iPhone market ” width=”19″ height=”19″ alt=”smile” style=”border:0;” />

    (thinking of you, China and Russia)

  8. I see Ballmer moving WinMo to a MS device after Android starts cutting into the WinMo market-share.
    The iPhone will have more of an impact on bring in new smart phone users (cutting into Nokia’s, Motorola’s, LG’s, Samsung’s strong hold which is plain cell phones), the other market the iPhone is going to take market-share from is the Business market were RIM is the major smart business phone. WinMo’s market is so fragmented across mostly the cheap low-end knock-off (Palm, RIM, Apple) devices that MS is likely to be squished by RIM when they expand into the lower end smartphone market.

  9. I see Ballmer moving WinMo to a MS device after Android starts cutting into the WinMo market-share.
    The iPhone will have more of an impact on bring in new smart phone users (cutting into Nokia’s, Motorola’s, LG’s, Samsung’s strong hold which is plain cell phones), the other market the iPhone is going to take market-share from is the Business market were RIM is the major smart business phone. WinMo’s market is so fragmented across mostly the cheap low-end knock-off (Palm, RIM, Apple) devices that MS is likely to be squished by RIM when they expand into the lower end smartphone market and Android because it’s free and their is no MS to pay so the low-end device markers increase their margins.

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