Subsidize This

Arik Hesseldahl in BusinessWeek, “Why AT&T May Deep-Discount the iPhone”:

The big thing about the next iPhone was supposed to be high-speed Internet access and tools for business.

Says who? I know, everyone with even a single toe dabbled in gadget-blogging is calling the next-gen iPhone the “3G iPhone”, but when has speculation ever accurately predicted next-generation iPods? 3G networking could well be the least of what’s cool about next-generation iPhone hardware.

As for tools for business, they’re coming to all iPhones, not just new ones, when the 2.0 OS ships in a few months.

Instead, it’s looking like iPhone 2.0 is all about price and that ever-awkward relationship between Apple and AT&T.

So says one report, using one anonymous source, from Scott Moritz, a “reporter” with an appalling track record regarding Apple and the iPhone. The same Scott Moritz who reported in July last year that Apple had cut back its production order on iPhones based on a “trading note” from Miller Tabak, a note which, it ends up, didn’t actually exist. And, as we know now, Apple went on to sell more iPhones than expected in 2007, not fewer.

So after a year of charting a new wireless business model by selling the vaunted iPhone at premium prices, the nation’s biggest phone company may resort to the oldest trick in the cellular book: big discounts.

Do you really think anyone at AT&T has seen or knows the details regarding the next-generation iPhone, given that they first laid eyes on the original one just before its debut at Macworld Expo?

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.

Sounds a lot like what people wrote about the iPod in 2002: competitors haven’t caught up yet, but surely they will, because, well, just because. In the same way that surely, eventually, Ford and GM will start making cars as well-engineered and designed as the Germans and Japanese, because, well, because.

Published reports that first appeared on the Web site of Fortune Magazine [sic] 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.

No, it was not published reports, plural. It was one published report, singular. By Scott Moritz. All the other reports regarding this purported $200 AT&T iPhone subsidy were based on Moritz’s report for Fortune — no additional sources or original reporting to corroborate this subsidy story.

Such a discount could cause a surge in demand.

I find this theory intriguing, that when prices go down, demand “could” go up. With this sort of deep economic insight, it’s no wonder people read BusinessWeek.

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.

Except for the 30 or so different $400-800 phones at Amazon, this is a very good point.

Yet with rival smartphones like Research In Motion’s BlackBerry and a new Palm Treo selling for as little at $99 at some carriers, competitive pressures are building.

Because there weren’t any $100 BlackBerrys or Treo a year ago?

AT&T brings in about $90 a month from each iPhone user, reckons John Hodulik, analyst with UBS Investment Research (UBS).

I wonder if Hodulik is aware that the rate plans are published, and that they make $90 per month sound like a very unlikely average?

“When Apple cut the price on the iPhone by 33% earlier this year, it stimulated demand,” he says. “If this new price turns out to be true, it would do it again. It’s like déjà vu all over again.”

Again with this intriguing theory of lower prices creating higher demand. Perhaps they should give the iPhones away for free — perhaps demand would then go even higher.

The article ends with speculation that the next generation iPhone hardware, if it’s called something other than just “iPhone”, might fall outside the purview of Apple’s “iPhone” exclusivity deal with AT&T. I.e. that their existing deal might cover only the original iPhone, and that Apple is free to shop the upcoming “iPhone Pro/Mini/Nano/Steampunky Olde Timey Handset/Whatever” to other carriers. (I was thinking along similar lines two days ago on the Twitter.)

Hesseldahl mentions this in the context of explaining why AT&T might push for this $200 subsidy:

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.

This comes so close to uncovering the obvious and glaring problem with a $200 AT&T iPhone subsidy, but, alas, Hesseldahl and his keen economic mind walk right past it. The problem is this: why would Apple allow AT&T to sell iPhones for half the price of what iPhones cost in Apple’s own stores (including this one)?

Subsidies only work when they’re sold in conjunction with two-year contracts. It’s possible that Apple could do the same, and sell subsidized AT&T-contract iPhones in Apple Stores, but that would mean abandoning the innovative (and very appealing, very successful) model of activating a new iPhone at home, via iTunes, rather than sitting around in a store for 45 minutes making uncomfortable small talk with a salesman while waiting for your credit check and your old phone number to transfer over.

You’d think this might be worth a mention.