Are Cell Phone Subsidies A Thing Of The Past?

by Christopher Paul on June 9, 2009

So if you live under a rock, you didn’t know that Apple just announced their next iPhone model dubbed the iPhone 3G S… yes, the S is for speed. (Ed. Note: Who came up with that name? The 1800-MATTRES – leave off the last S for Savings guys?) It comes with more RAM, a faster CPU, more storage, and a few other things that make it the envy of Apple fanbois everywhere. You can order it now from or pick one up in about 10 days or so assuming they don’t run out in an hour. The cost is $199 for the 16GB version, $299 for the 32GB version – a bargain if you ask this very happy current iPhone 3G owner fanboi.

But for us current owners, there is an extra fee involved. You have to cover the cost of the equipment subsidy of about $400. Whah!!??!! $400 dollars?? SRSLY????


If you think that $699 for the 32GB version is a lot, you’re not alone. And people are up in arms. There is already an army of Twitterrers (people who tweet.) amassing a protest to the added cost. Its not anything new to the cell phone industry but this is no ordinary phone – its the iPhone! Not only is it a gift from almighty Jobs, it really is a cool device and set the bar high for everyone else – Microsoft, Google, Nokia, and (/me snickers) Motorola. BWUAAAAAHAHAHHAHAHAA!!! 🙂


If one were to complain about the price – but look back on the cell phone industry – you’d know that this is the way its always worked. I don’t know if its really justified because I can’t determine if the cost of the phone really is $400 more if it weren’t subsidized. But regardless of whether it is a legit discount, all cell phone carriers have locked you into a contract twice – once with the service agreement itself and again with the device subsidies. When people used a cell phone just for dialing numbers, I doubt anyone cared. They might not have noticed that cell phones were getting smaller, faster, with more features because it still did the same thing… make and receive calls. It never streamed a YouTube video over the airwaves, played my iTunes music, or let me watch that movie I rented from the iTunes Music Store.

But the iPhone changed all that… the phone was sort of a phone, sort of a mini personal interactive computing media device. And when you think of a phone in those terms, subsidies just don’t make sense. PCs (Mac, PC, Ubuntu, or otherwise) aren’t subsidized. Netbooks, subcompact laptops, power workstations, and tablets all come with a price. That price stays constant if new features are added or the price goes down as the technology becomes older and cheaper to make; people get that. Hell, other electronics don’t come with an upgrade restriction. You want a new GPS device? Buy a new one! Another Kindle?? Sure, why not! You want a new iPod Touch? Yes, that’s right, you can buy a new one… with NO “penalty” or contract whatsoever.

So all the things that makes the iPhone special – the GPS, music, movies, eBook reader, and so on – can be replaced so easily and at any time without an extra fee added to the cost of the new device. Its easy to see why someone wouldn’t want to shell out an extra $400 just to get a slightly faster version of an electronic device they already have.

But that’s the way the world works, they say. True. But look at all the bad press AT&T is taking from this. And O2, as well. Now, in the short term, this isn’t going to do much. But long term, as Apple seeks to increase its user base, it could. But more importantly, other carriers and hardware manufacturers could find themselves taking advantage of an opportune moment where consumers don’t want to pay a extra on top of the long term agreements they are already obliging to. When your netbook costs $299 and can do more, you might decide its not worth it and go cheap on the phone and get a netbook that can do YouTube, Skype, music, video, and everything else – no strings attached.

So I think AT&T (and Apple) are going to get burned in the long term. The ill will these “games” they play are only going to alienate their base and slowly drive away their customers. As the iPhone-like cell phone devices become so commonplace, you’ll see this happening. Could it mean that Apple will want to set certain price points for all their future portable media devices? Sure. They do it with their normal line of iPods and it would do them well to keep the price constant across all customers. Will AT&T “let them” do that? Eh… probably not. But this argument for unsubsidized phones is greater than AT&T and Apple. Its about consumers equating their phones/media devices to the same cost structure as all their other electronics. Its about realizing that the double lock in they are subject to isn’t right and all about some company charging them twice for the walkman they paid for.

So I think that phone subsidies are going to go away. Maybe not in time for the next iPhone but perhaps the generation after that. Microsoft and Google might come along with their massive piles of cash and build something that will steal Apple’s thunder and remove cell phone carriers out of the picture. If I wanted to topple Apple’s dominance from their PDA/Smartphone position, I know I’d want to make my product as attractive as possible and constant, fair pricing is just one way to do it.

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