“Basically, he’s betting that, at $199 a pop, he’ll sell so many iPhones that Apple will dominate the rapidly developing mobile Internet platform . Indeed, he believes that this new phone is so compelling-and so within the reach of the masses-that he’s revisiting the deal he struck with AT&T on the 1.0 version, which reportedly gave Apple up to $12-$18 per month on every iPhone AT&T serviced. Instead, AT&T and other international carriers will now be providing a subsidy — supposedly about $200 a phone — to make the device affordable enough for the masses. The math works pretty well for AT&T, which would lock in new subscribers to two-year contracts; the cheapest service plan, with data, is $69.99, $10 a month more than the old one,” Quittner writes. “But for Apple? Over the course of a two-year contract, the company could lose as much as $160 per user versus the old deal.”
“Making Jobs’s bet even more dangerous is the fact that we’re about to see a whole raft of devices coming out that could give the iPhone 3G real competition. Google’s open-source operating system for mobile phones, Android, is just about ready to be shown off in many handsets, from makers such as HTC, Motorola, Samsung and LG Electronics. You can bet many of those phones will be way cheaper than $199,” Quittner writes.
“But… this is just the start and it’s easy to see how the iPhone could take off. Once you control the platform, you call the tune. And if that happens, it will be Steve Jobs’s magnum opus,” Quittner writes.
Full article here.
We are content to let people continue to sound like they did during iPod’s first year. iPhone 1.0 took 20-28 percent of the U.S. smartphone market, depending on who you ask; and that was without apps, 3G, GPS, and a $199 starting price tag! Apparently, that fact is too difficult for some to discern the implications. Soon, it will be impossible for even the naysayers to deny what’s happening. Jobs isn’t betting or hoping for market share, he’s taking it. And all of the iPhone knockoffs in the world aren’t going to do much to stop him because more consumers than not are too tech savvy nowadays to fall for lookalikes that don’t workalike.
App Store = Money
iTunes store = Money
Games = Money
I think that Apple will be fine
Let’s see…
$200 up front subsidy
or
“as much as $160” over two years.
Hmm…
Seems like a no brainer to me!
Plus with the lower price and new features Apple might sell twice as many per month as before.
Does *not* sound like a gamble at all.
Since Apple is going to control the market they might as well demonstrate their confidence and begin to control it as fast as they can.
google’s android is a year away still from shipping products,
MSFT windows mobile can’t handle touch well(single point)
what threat for the next year? My only problem with the iPhone 3G is AT&T;is going to be a dick.
The new iPhone guarantees Apple will get yet more of my money. I was waiting to see if it would entice me into buying. It did. Mmmmm am looking forward to it.
From the first contract details trickling in, it seems that the carriers may be willing or offer at least the 8Gb phone for free with a contract only about $10 more than the current model. That can only be win-win-win for Apple, the carriers and the consumers. Bravo!
I think I see it. Steve just became the mobile operators bitch. Instead of selling the iPhone directly to millions of individual consumers, each of whom could make their own decision and build pressure on the mobile operator to support the capabilities of the device, he now sells to the operators directly (essentially acting as their agent in the Apple stores) and has thusly positioned the iPhone just like any Nokia or Motorola handset. Now his customer (AT&T;, et al, not consumers) can pressure him for the feature set. Bad move, Steve. What’s next, a kiosk in Wal-Mart?
Aren’t those same consumers smart enough to see they’re still paying more than $400 over the life of the phone? So the phone is cheaper. The contract is more expensive than before. Duh.
Also you can bet that future software updates will not be free since Apple still needs to make money. Just like you have to pay for OSX you will have to pay for iPhone 3.0 4.0 etc.
My current cell phone monthly bill is usuall over $100. With any luck I’ll save money on this deal! LOL! Thanks, Apple!
Talk about ignorant.
What, you think they haven’t been able to make it cheaper to manufacture???
The hardware has barely changed. The new plastic back is probably cheaper, the camera is the same. I’d bet my left nut that they made it a whole bunch cheaper to make, just like they did with the iMac.
To sell it for $200 cheaper does not mean a $200 subsidy, thats just stupid and/or naive right there!!!
I’d bet its closer to $50 -$100 subsidy, with the rest saved on manufacture after 6 million units helping to amortize the cots of tooling etc. If the Industrial design had changed THEN the subsidy might have to be bigger!
TIME is being a bit shortsighted here. No news there then.
DD buying the $299 phone = Money
😀
Interestingly, in Canada at any rate, it looks like the iPHone will not be available through Apple stores or other resellers. When you click on the Apple Canada Store ‘Where To Buy’ link, it takes you to Rogers or Fido. No pre-orders in the Apple Store. And the two carriers, like most of the first 22 countries, have virtually no details about contracts, availability,etc. on their sites yet!
If Apple sells twice as many iPhones, the difference in revenue won’t be noticed. Apple also will have the money in hand, rather than waiting for AT&T;to collect it and pass it on to Apple.
What this article fails to realize is that Apple couldn’t use that pricing model in other countries. Either Apple ran into legal issues (France) or simply carriers who wouldn’t play ball. Apple was trying to break the status quo, and while some success was realized, it was fleeting at best.
AT&T;needed a highly visible shot in the arm to grab market share from Verizon Wireless in the U.S., and what better way to do it than to have exclusive rights to the iPhone? Worked pretty well. However, now that AT&T;is seen as the iPhone carrier in the U.S., it decided that giving away a portion of its fees didn’t make sense, so it renegotiated the agreement with Apple. Apple had lost its position of power due to having to agree to subsidized deals with carriers in other countries, and had to change it up for AT&T;.
However, 30% from AppStore sales will be pretty good revenue.
“Steve Jobs Bets the Apple Farm”
iCal it.
(Hyperbole is not a nervous tree trunk.)
Carriers are taking more risk than Apple. Apple is making a profit on every iPhone sold to ATT and other carriers. Those carriers sell the iPhone at a loss in order to make profit over 2 year contract. Apple risks nothing really. Apple sells 8 GB to ATT for maybe $300, and ATT eats the $100 to sell it to you for $199. No skin off of Apple’s nose, and much simpler accounting.
But his sister Hyperbola is infinitely curvaceous!
I tried a magnum opus once.
It kept falling off…..
Here’s hoping that if the Data Plans are to expensive, I can get the iPhone in Canada as just a Phone No Data Plan. I currently have an iPod Touch and it works just fine for me all I need is the Phone part so I can get rid of the (Telus) counter weight on my right hip., I am paying $45 a month now and if I can get a plan from Rogers with unlimited (or reasonably limited) for under $60 I am in other wise Phone only please. I already Pay Rogers for high speed Data at home and have little problem getting data from Hot Spots (Unprotected Wireless Base Stations), so I only need 3G to fill in the gaps.
Steve Jobs didn’t have any other option! With Android coming, with the competition and their copies of touchscreen phones… Apple needed to come with an affordable worldwide plan!!!
“Aren’t those same consumers smart enough to see they’re still paying more than $400 over the life of the phone? So the phone is cheaper. The contract is more expensive than before. Duh.”
They may be able to see it, but they don’t have a choice.
OMG, he IS dying!!!
I’m willing to pay $10 a month more for 3G because I know that I will use it a great deal more than the 2.5, hence I am buying more bandwidth. Doesn’t bother me.
Hopefully the minutes will stay the same….
“a whole raft of devices”
It’s a long way from China on bamboo and twine.
Josh: Quittner while you’re behind.
Narrow minded traditionalist of a journalist! This guy thinks only in terms of “In America things go like this and like that… blablabla”. The iPhone has just had it’s probe year in USA and in very few other countries… but now, the serious selling is just starting! …And yet, still half of the world is not in line!!!
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MobileMe is money;
AppStore is money;
iTunes store is money.
Yeah, AT&T;is screwing this up…
First, let’s charge $30/month for the 3G network — then not include SMS — that’s another $5 for 200 messages — so it’s $15/more than what I’m paying now.
I think I am going to keep rockin’ my “Classic” iPhone — I might just get me some Applecare.
Seriously — Why doesn’t the phone companies “GET IT”
“Desperate Microsoft sends letter to Windows Mobile ‘partners’ on eve of iPhone 2.0 launch”
(http://macdailynews.com/index.php/weblog/comments/17477/)
Has anyone checked to see if Andy Lees, Sr. Vice President of the Mobile Communications Business for the Microsoft Corporation still has a pulse? More likely, he’s probably still unconscious.
Ok, here’s the deal. Apple is banking on people purchasing 5 apps per year from the App Store. Let’s average the price at $20 per download. So the revenue in = $100 with $30 margin going to Apple. However, you now have millions more people that can connect to the iTunes store for music and videos. That may be worth another $50 per user per year. Apple’s margin may net them $2-3 per month or $24-$36 per year.
Based on a conservative model, Apple is betting that volume increases in iPhone units combined with the App/Itunes stores versus the cost/challenge/difficulty in creating and maintaining exclusive carrier agreements is more compelling in the long run.
Platform saturation/dominance is key.
question, what about what APPLE is loosing under the term when old iphone customers upgrade, wont the b loosing that addtl 12 or 15$ a month (or what ever the terms were under the original k)
Another brilliant move by Apple. They’re selling a Mac in a phone, and now they’re expanding their user base by cutting the price. Very smart.
I wish AT&T;included their WiFi spots for free with this deal.
“Making Jobs’s bet even more dangerous is the fact that we’re about to see a whole raft of devices coming out that could give the iPhone 3G real competition.”
First, it’s yet to be seen if any product will give the iPhone “real competition”. But for purposes of this discussion, I’ll assume it’s true.
“Over the course of a two-year contract, the company could lose as much as $160 per user versus the old deal.”
Second, there is a mistake in this math. You can’t “lose” $160 on phones that you would never have sold. Let’s say the iPhone would have sold 20 million phones over the next 12 months at $399 each. If that were true, is there any doubt in your mind that they will sell 30 million or 40 million at a price of $199? The $160 per phone that they lost on the first 20 million will be more than made up for by the sale of the extra 10 to 20 million.
“Basically, he’s betting that, at $199 a pop, he’ll sell so many iPhones that Apple will dominate the rapidly developing mobile Internet platform .
I’d put it slightly differently. I’d say that at $199 a pop Steve Jobs is betting that he’ll create an entirely new platform owned entirely by Apple. People are only now beginning to see the implications of Mobile OS X. They are on a course to dominate the mobile internet. The halo effect for Macs will be enormous.
Frankly, I think Apple could have gone either way and won. Apple’s overall strategy is so sound they have a plethora of tactical options all of which will sweep the competition away.
Magic words:
“extremely dangerous”
These FUD writers are quite skilled at their trade.
I am not concerned about paying ‘more’ for the iPhone as compared to other smart phones…. look at it….. it’s features, capabilities….. YOU SHOULD PAY MORE!!!! However I look at is as paying less….. why pay these other companies anything (even free) if their products don’t do what you want them to do….
I laugh when other people say they get the web on their phone…. yeah, ok….
“The halo effect for Macs will be enormous.”
And Safari will be everywhere. Hopefully, IE only sites will become a distant, bad memory and more sites will load quickly and work just as well with Safari as with Firefox or IE (or Camino, etc.).
The iPhone could easily dominate as a platform, if it were unlocked and no bound to AT&T;.
AT&T;is like a boat anchor attached to this rocket.
Dave,
Your math seems way off:
iPhone 1.0: $400 + (24 * 60) = $1,840
iPhone 3G: $200 + $24 * 70) – $1,880
Difference over the life of the first two-year contract is $40. I am pretty sure you’ll be replacing your old iPhone with a new model after those two years anyway. If we examine this math further, the new iPhone is actually cheaper for the first 20 months of your contract; only during the last four months does the $10 higher monthly rate catch up and overtake the old iPhone cost.
AT&T;allows you to break out of your contract without penalty after 20 months. In other words, you can get a new free replacement phone at that time (and sign a new two-year contract). Get it, sell it on e-Bay, pocket the money and when new iPhone becomes available, get that one (with another contract extension).
Some analysts have already suggested that AT&T;’s upfront subsidy to Apple is in the neighbourhood of $350. Since Apple was selling the original iPhone at around $550 – $750 (depending on whether it was sold by AT&T;or Apple), the new iPhone, plus that subsidy, should bring in similar revenue, especially since everything is now upfront, instead of part of it coming over the next two years.
For Apple this deal is at least the same, if not more lucrative, than iPhone 1.0. For us consumers, it is practically the same (2.5% difference over the life of the contract). And by the end of next year, there will be about 50 million iPhones in the wild. That translates into about $25B in revenue, $10B in pure profit for Apple. Nice going!
It’s all about the total mobile ecosystem. Blackberry did not get to where they are with their old clunky handsets enticing people – it was the back end infrastructure, messaging and email, that gave them the play.
IPods are the same – better music players exist, but it is not the hardware, it is the software and back end infrastructure that made iPod/iTunes what it is.
Now with Exchange support, IBM’s announced support for iPhone and Domino/Notes (still a big corporate email player), and MobileMe – Exchange for the rest of us (thank GOD there is an alternative to the money sucking pig called Exchange!!), the iPhone PLATFORM will dominate the other players, and in short order.
Add to this the gaming capabilities of the PLATFORM, and the awesome development tools, and you have a real winner.
Try developing on BB – supporting a dozen or more code sets to handle the diversity of hardware. It is no wonder that BBs only do a few things, albeit it well.
Here, here. Taking it indeed.
Apple is totally disingenuous when it says “Twice as fast, half the price.” They have shifted where the consumer payments are going, but the customer ultimately pays more over the 2 year life of the initial contract.
iPhone 1.0:
$400
$1440 for 2 years service
————————-
$1840 total for 2 years
iPhone 2.0:
$200
$1680 for 2 years service
$120 for 2 years of SMS service (was included in 1.0 plan)
$100 MobileMe (not optional – needed for push services)
—————————
$2100 for 2 years
I don’t think AT&T;increasing the price of the service for 3G is unreasonable. My issue is with Apple’s advertising slogan. iPhone 2.0 is more expensive, not 1/2 the price.
Is is possible that this move is a way to capture the $$ from ATT up front instead of risking the iPhone being hacked to work on other networks? Doesn’t that let Apple recognize the revenue as a straight sale instead of riskier monthly fee model?
Apple’s license to print money was approved yesterday.
There’s a reason why Joshua Quittner is a journalist, not a businessman. He fails to see the obvious. Gillette made a fortune by making money on the blades, not on the razors. (The same can’t be said for Motorola, which is having a bad time making money on their Razor, but that’s another story…) It may be that by pricing the iPhone competitively, aided with subsidies by AT&T;and other telcos, that the Laffer Curve will kick in. That is, the lower the price, the greater the demand. And it could be too, that the margin that Apple has on the iPhone allows them to price it this way, and thus, force their competitors to accept lower margins. And that can be a downward spiral if you’re the competitor.
Joshua Quittner has written many good articles. But this isn’t one of them.
What none of you mention is fairly simple… Apple was making HUGE profits on the original iPhone at 399/499/599 price points, as was AT&T;.
And remember Steve’s words “$199 MAX price” – which does not exclude the possibility of a lower price (as we have seen in the UK already advertised) for the 3G iPhone.
Apple would never enter into a deal where it was not making money. To call this “dangerous” is more FUD mongering than anything, and a desire to get hits from the article (not from me).
AT&T;is also making money, regardless of what they charge.
And in the end, we are paying. $15 more a month ($10 for 3G and $5 for 200 messages) seems reasonable to me.
With Iphone 1.0:
Apple got: 399 + (carrier payments ~ $240, if we assume $10/sub).
Iphone 2.0:
Apple gets: 199 + subsidy.
No carrier payments.
Plus folks are not that dumb to see that they are paying for the subsidy via the $10/mon increase.
Moreover, $199 price is going to cut into Ipod business. I think apple moved from three sources of revenues to two with ipod business getting folded into the iphone. I agree the app. store may bring in additional revenue but not sure if that’ll offset the hit they’ll take on ipods.
@Steve516 – I’ll bet every time gas goes up 10 cents a gallon you say it’s OK, since it’s only $2.00 more per fill up. Just because the network is 3G doesn’t make it OK for AT&T;to charge more. 3G is what they had to do to stay in the market at all. It’s not value added, it’s value maintained.
I paid less for the MacBook I’m using now than I did for my original 128 Mac. If you keep it in constant dollars, I paid a lot less. The current MacBook is what Apple had to do in order to maintain its leadership. It would be laughed at if it tried to sell a 128K Mac today. For AT&T;, 2G is gone, 3G is just keeping up.
As far as SMS goes, its pricing by AT&T;is a crime against our children and should be prosecuted as fraud.
“Basically, he’s betting that, at $199 a pop, he’ll sell so many iPhones that Apple will dominate the rapidly developing mobile Internet platform.”
Not so sure that is true. Sure, Apple would love to dominate, but I think the more likely goal is to become a key player. As more consumers enter the smartphone market, there will be room for more than one type of handset to have significant marketshare, with everyone seeing healthy increases in total units sold.
This subsidized handset/reduced price strategy also makes it more likely that Apple will increase their marketshare in Europe (many Europeans that post here have broken down this problem quite well for us).
It is not such a big gamble. I think it will work out nicely. If your object is to change the world (as Steve’s is) it is exactly the right thing to do. This is not a phone. It is a computer platform that also makes phone calls. It is also a gaming platform with kinetic abilities like a Wii. Having the mobile Mac Platform will change my world. The fact that I can dump by Razer and add little to my monthly bill only makes it more attractive.
Everybody needs one.
Copiers like Microsoft will never catch up. Is there anyone out there who can compete with this kind of on-going innovation? Someday someone will rise to the challenge. It will be a while though; five years I would think. It will be really interesting to see what the computer landscape is like in ten years.
Thank you Steve!
“the fact that we’re about to see a whole raft of devices coming out that could give the iPhone 3G real competition”
I can’t help but notice how these pundits love talking in vague terms about some product that’s always just around the corner that they think will give the iPod / iTunes / iPhone some “real” competition. If I remember correctly the Zune was supposed to be some “real” competition to the iPod and there have been countless online music stores (sales and subscription models) that were supposed to offer some “real” competition to the iTunes store, to cite just two examples. And we know how those worked out. Apple is not omnipotent and, obviously, competitors of all stripes will continue to innovate and develop alternatives to Apple’s goods and services. In the meantime, however, such pronouncements about the coming of “real”competition reflect no real insight and even suggest a certain journalistic bias, but then again, that fits perfectly with the rest of the Time magazine.
Quittner reminds of that kid sitting in the back of my Business Analysis class who answers my question, “If my dealership is losing a $100 per car sold, how many do I have to sell to make a profit by volume?” with “Uh, A hundred?” There’s always one in every class; and I get to respond with “That’s why you’re in my class!” Obviously, Quittner didn’t pass…
Inferior minds will always embarrass themselves in the presence of greatness and mask their insecurity with unfounded criticism. If all the other mobile phone makers aren’t shaking in their boots, they should be!
This guy gets it. The I-Phone is just like Windows Mobile without all the great enterprise functionality consumers are clamoring for. After Apple’s snore fest at WWDC people will flock to Windows Mobile devices. It’s a no-brainer.
Your potential. Our passion.™
You can talk about AT&T;and all related to it but in the UK we need a change from O2.
O2 is ridiculed as the most expensive network provider in the UK and indeed anywhere else that it might care to be. This very fact is preventing thousands from owning iPhones. Every single person I’ve talked to about it agrees with that. And I’ve talked to loads of people on the subject, just because of that in some cases.
Another thing is that everyone would like pay as you go. Even if the iPhone cost more by £100 or so, it would still be more attractive than for less on a fixed contract that for many is too extravagant.
Open your ears, Mr Jobs!