Five reasons why iPhone won’t be subsidized

Ars Technica’s article, iPhone to be subsidized or not? We’re getting dizzy trying to answer, is a bit more muddled than their usual coverage:

Will the iPhone be subsidized by AT&T or not? Yes? No? Maybe? Reply hazy, try again? The theories are all over the map, but recent reports say that the answer is “probably not.”

I really had the impression that this was nearing resolution (or consensus) already. In learning about Verizon passing on the iPhone, we learned what Apple was after: a share of ongoing revenue from the mobile carrier’s subscribers. It seems like a reasonable substitution for subsidies: what would normally be discounted from the up-front price is instead paid out to the hardware supplier. Why shouldn’t we believe that’s what Apple got from AT&T/Cingular? It makes sense for Apple, as:

  • It protects the price point of the iPhone and the iPod, the relationship of which is very critical.
  • Such price point protection allows Apple control across markets – iPhones are not going to be radically different in price between the US, UK, Germany, and South Korea due to different network providers offering different levels of subsidies.
  • It gives Apple an ongoing revenue model to allow for new feature updates, in keeping with Sarbanes-Oxley (a point we learned about with Apple’s 2007Q2 conference call).
  • There’s clearly no need for Apple to lower their price point to the consumer in order to garner higher volume: if this is like most other Apple product launches, supplies are likely to be constrained in the first couple months as production ramps up.
  • Prices will drop, not at the rate of new phones (often halved within six months, at least within the UK), but at the rate of iPods (more like $50/year for the top-of-the-line iPod).

No, there’s no way we can know for certain until the iPhone is launched, but I believe this is in keeping with the Apple we know: hacking an entrenched system to work to its own advantage. It can’t get around the network carriers being the gatekeepers to its hardware, but it can tweak the existing model so that rather than cheapening its product, it gets even more profit.