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The new iPhone will be released on June 19th, and while data upgrades, new features and lower costs makes the product attractive to new users, current iPhone owners may experience sticker shock when they try to upgrade on June 19th.
AT&T customers purchasing an iPhone for the first time will be able to get a 16 or 32GB phone for $199 or $299. But many customers in the middle of their AT&T contracts for first or second generation models will have to spend $399 and $499 to upgrade.
The price increase has already gotten a negative response from many vocal iPhone owners. The Washington Post called the new iPhone a “sucker’s bet” yesterday, while CNNMoney is waiting until Christmas to get one, and TechCrunch thinks it's a "very questionable upgrade."
Angering early adopters may not work out for AT&T longterm — AT&T's exclusive contract with Apple could expire as soon as next year — but in light of its unusual relationship with Apple and the cost of supporting the network-sucking smartphones, it looks as if AT&T is focusing on growing the iPhone user base at the cost of customer loyalty.
But the strategy has more to do with the way the devices are sold than any premeditated plot to suck iPhone users dry.
AT&T spokesman Seth Bloom says “current iPhone 3G subscribers understand that they got a heavily subsidized phone less than a year ago. That said, most are eligible for a subsidized early upgrade price...or they can wait until they are eligible for a full upgrade. Most times that is about 18 months into their two year contract.”
Financially, AT&T is in a tight spot. They purchase the devices from Apple, and the money they spend subsidizing the devices is recouped through the monthly fees charged to consumers for data and connection services. Those fees have steadily increased since the iPhone launched two years ago. But if AT&T forgoes the money they spent lowering the cost of the device for new users, they'd sacrifice a lot of profit.
The carrier already swallowed subsidy costs with iPhone upgrades the last time around. First generation owners who wanted new iPhones then were given the cut-rate prices of $199 and $299. But if AT&T continues to subsidize iPhone upgrades each time Apple comes out with a new one, they could stand to lose a lot of money.
American cellphone carriers are struggling right now to keep up with the technological demands of smartphone users, and they're not always succeeding. While AT&T has seen a huge increase in users due to its role as the exclusive provider of the iPhone, it is also handling much higher bandwidth costs due to the high user adoption of the device.
"Apple got a very aggressive agreement with AT&T," says Rob Enderle, principal analyst at Enderle Group. "But when you’ve got an exclusive for what is argueably one of the hottest products ever, I have trouble seeing that as a negative. They may be paying Apple more than they'd like, but they're getting back more than anyone else as well."
By lowering the price of the device for first time buyers (an 8GB 3G model is available for $99), AT&T and Apple have made the barrier to entry for the smartphone market all that much lower. And the expectation that current users will make do because they have no other option is valid — for now. They don't really have another network to go to.
Chetan Sharma, president of Washington-based Chetan Sharma Consulting, thinks it’s a double-edged sword: “The iPhone is a highly subsidized device. AT&T has to make up for the $300 subsidy for a period of two years. It simply makes more sense for them to try to acquire new customers than keep the old ones happy. Because their costs are rising, and the money they’re getting back from iPhone sales is getting lower.”
And the moment, it looks like paying more for new iPhones is simply something AT&T customers will have to stomach.
“It’s just the nature of the plan," says Enderle. “You kind of lease a phone, and at the end of the lease, you get to keep it. You pay some money at the front, and if you want out of the contract, you get a penalty because you have to pay for the rest of the phone.”
A big risk to this approach, however, is customer loyalty. Many customers are already planning to leave AT&T as soon as they have the option, and analysts say that a pact between Verizon and Apple to sell the iPhone next year could increase sales by as much as 50%.
“There is a risk that AT&T might create a group of users that are more tied to the device than the network," says Sharma. "If they’re not happy with the network, when other options become available they will flock away.”
But that may come to fruition no matter how well AT&T treats its customers. Many cellphone users unwilling to sign on with AT&T are just waiting in the wings for Apple to partner with other carriers. And if another carrier offers better rates and services when AT&T's contract is up, many of the carrier's users will be quick to leave as well.
For now, customers should look to Apple to make a cut on price, because the company has more to gain than AT&T from the sale of additional iPhones. Says Enderle:
"The old phones aren’t that bad. They're pretty much going to do the same things as the new one. If Apple wants people to buy more phones, they should probably provide a rebate."