I was wrong: It’s Apple screwing us, not AT&T - Macenstein

I was wrong: It’s Apple screwing us, not AT&T

[WARNING: This post contains references to me attempting to do math, so all figures are subject to scrutiny and your usual criticism of how wrong I have it.]

Well, a full day has passed since the WWDC, and I think now with a little bit of distance comes clarity. I was pretty angrily bashing AT&T for screwing us current iPhone 3G customers with their $200 “early upgrade tax”, for the iPhone 3Gs, and I have come to the decision that my anger was misplaced. The real bad guy in this debacle is Apple, not AT&T.

Sure, it would be nice if AT&T let us upgrade to the iPhone 3Gs for the same price as new AT&T customers, but I cannot really blame them. As many of you pointed out, when I bought my 16 GB iPhone 3G last year, apparently AT&T paid Apple an extra $400 in subsidies. In the back of my mind I of course knew that already, but it was sort of way back there, and after a year it got thrown out with all the other junk my brain conveniently throws out each year. Luckily I wasn’t alone in my incorrect thinking as many of you voiced your support as well. But you were just as wrong as me. The reason we made this mistake is understandable – in my mind, I bought the iPhone at an Apple store for $299, not from AT&T. But in reality, AT&T spent more on my iPhone than I did.

If AT&T had to lay out the same subsidy on a new iPhone 3Gs for me and all the other iPhone 3G customers now, before our contracts expired, they would either have to lock us in for 4 more years to keep from losing money, or go bankrupt. And while you might be crazy enough to say “Well, then give us the option for the 4 year thing”, what happens next year when the next iPhone comes out? You want a 6-year contract?

It’s actually Apple screwing us

When all is said and done, it is Apple we should really be pointing our collective finger at here, not AT&T. Why? Well, let’s look at the price of the iPhone 3Gs. AT&T is charging $699 for the iPhone 3Gs if you do not want to lock in to a long-term contract. I’m going to go ahead and round that to $700. Now, let’s take a quick look at the 32 GB iPod touch that Apple sells. It costs $400 ($399). So the iPhone 3Gs costs $300 more than the iPod touch. Now, let’s think about that.

What makes an iPhone an iPhone and not an iPod touch? Well, there’s the phone, obviously. And then the GPS. Yesterday Apple added a less crappy camera and a compass to the iPhone. Now, how much do you think those things cost Apple to put into their millions of iPhones? We don’t yet have official teardowns of the new model, but a estimate from a teardown last year on the iPhone 3G put the total cost of the iPhone at under $100. Obviously you need to factor in shipping, R&D (although zero this time for industrial design), advertising etc, but spread out over 20 million iPhones, those numbers come down pretty quick. Apple has also bumped up the speed of the new iPhone, and since initially a new chip might ad a little to the cost, I will arbitrarily pull the generous figure of $30 for the total cost of all the new things added to each iPhone. So let’s say each iPhone costs Apple $130, and they are charging us $700.

Math is not my strong suit

Now, let’s subtract that arbitrary $30 of mine from the difference in cost between the 32GB iPod touch and the 32GB iPhone 3Gs, and we find that Apple is charging $270 MORE for and iPhone than an iPod touch if you added all the iPhone’s features to it. Where’s that $270 come from? Well, obviously it comes from us. We’re paying $270 more than we should to Apple via AT&T, and it is not AT&T’s fault. It’s Apple’s.

Why? Because Apple is charging way too much for the iPhone.

“But, what about other phone makers?” you say. “There are tons of other $700 subsidized smart phones out there”. True. However, Nokia is not selling in effect a version of the Nokia N97 “without the phone” in the way that Apple does with the iPod touch. Apple has an extremely similar device out there right now in the iPod touch (running the identicla OS, as Apple often points out) that inexplicably costs us $270 more than it should.

OK, so what SHOULD the iPhone cost?

I’m no stranger to Apple and its pricing, and I do not mind paying “the Apple tax” in general. However, by my calculations, the 32GB iPhone 3Gs should cost about $430 without a contract. And of course, that’s just assuming that the base model 32GB iPod touch that I am comparing it to was reasonably priced at $400 to begin with, which I ma not so sure is the case. Given the iPhone 3G teardown, I’d be surprised if it cost more than about $80 to make.

Yes, I realize Apple is free to charge whatever they’d like for their products, and as an Apple stockholder I am a fan of them making all the money they can. I also realize that many of you are bigger fanboys than even I am, and will rush to defend Apple saying “If you don’t like the price, then don’t buy it”. And I won’t. There’s not enough value in the iPhone 3Gs to make me want to pay such an inflated price to upgrade. However, I wanted to try to help focus some of the AT&T anger that is being thrown around on the interweb, because I was guilty of it as well. AT&T sucks for many reasons, but the cost of the iPhone upgrade is not one of them. If you think you deserve a cheaper upgrade path to the iPhone 3Gs, ultimately it is Apple that is screwing you.

33 Responses to “I was wrong: It’s Apple screwing us, not AT&T”
  1. brian says:

    I’m thinking with all the bitching about this Steve might come back and say that the 199 and 299 is for everyone. I’m just wondering will every Apple employee check to make sure that you are allowed that upgrade price?

  2. Brad says:

    that is what comes out of the easy pay’s the employee has no clue if you are eligible the easy pay contacts AT&T to check your contract. there is no way around it

  3. Jay says:

    Here’s how you DON’T set pricing for a product: by asking the public, “How much would you LIKE to pay for this item?”

    Here’s how you DO set pricing: you figure out what people will pay for for it in the quantities that you need it to move off the shelves.

    Have you read the heming, hawing and weasel-wordery of the Portelligent analysis? It’s clear that it is rank conjecture on the part of Portelligent. I wonder why they would release such an attention-getting report on such a popular product?

    The true cost is somewhere in the middle. But the iPhone pricing is precisely in line with market competitors. Why should they undermine stockholders by undercutting the competition? That has never been Apple’s market.

  4. imajoebob says:

    The maths are secondary; your basic logic is spot on. One more support for your theory: Apple doesn’t want to sell a new phone to the 3G owner. They’re primary interest is new customers. They don’t need upgrades right now, they’ll get them next year when the contracts expire.

    Great insight.

  5. J. says:

    ok, So it costs them 100 bucks to make it. But how much money did Apple spend on research and development in the years leading UP to the initial iPhone launch? And how much does it cost for Apple to support them? How much does it cost Apple to continue to upgrade and innovate the phone?

    So you think it’s Apple screwing you? I think you are dead wrong. Apple has every right to make money and make a profit on what they have done to build the iPhone. You think it only cost them 100 bucks to Make? That might be the cost of the parts, but there is Much more to it.

  6. lord-helmet says:

    Apple charging an obscene premium for it’s products?!?! Say it ain’t so! Seriously, where have you been the last 25 years?

  7. Mike says:

    I think imajoebob hit it. Apple is slowly adding features that people have been asking for since day one, getting *new* customers. That they manage to convert old customers as well is, well, gravy. I know more people who bought the 3G as a first iPhone – because they were waiting for 3G – than who upgraded. I wouldn’t have upgraded except for the 3rd party trade in offers – 3G just wasn’t worth it to me, as I was on wifi almost all the time anyway. The 3Gs has even less to offer a 3G owner. I figure there sales will be mostly new iPhones, and people upgrading their original 2G phones when their contract runs o ut.

  8. Zay says:

    Consider yourself all luck, I don’t even have 3G connection in my city…

  9. sqewie says:

    Apple is selling iPod touches with loss. To gain marketshare.

  10. Ajan says:

    I agree with Mike, that’s what is happening. Showing of small features like honking the horn applications and winning smiles across the world is something Apple is trying to do

  11. Mr Clicky says:

    Ummm, not sure I get the logic I’m afraid. Apple is effectively selling you a phone for the difference in price between the ipod and the iphone. With other smartphones you don’t get an ipod AND a phone you get a phone that plays media. Following this line of thought (and presuming everyone must have an ipod – and they must!) you’re getting a phone for an extra $270 and the convenience of both devices in the one package.

    What’s wrong with that?

  12. Dave-O says:

    It’s obnoxious enough when people bitch about AT&T (on iPhone pricing, they totally deserve it for MMS and tethering). You need to suck it up and replace your 1st gen iPhone. Give the iPhone 3G to your wife and shut yer yap.

  13. Adam says:

    Um, since when do companies base their prices on the manufacturing cost? The idea is to charge how much you think people will pay.

  14. Bjarki Guðjónsson says:

    I agree with Adam. This is THE most popular phone ever. Why undercharge? Do you honestly think Apple became debt free by charging as little as possible?

    On another note, I think you need to work on your reflections in Photoshop. The look nice on the 2D images, but the screw is all… well… screwy.


  15. Umm you do realise it has greater specs than the current iPhone bar the updated camera and the compass thingy?

    It has a freaking proper graphics chip in it for Pete’s sake (why won’t anyone think about Pete?).

  16. P.Helix says:

    Apple knows most ppl’s contracts are 18-24months..
    So, whats the point of releasing the “expected” or “wished for” iPhone in a new case.
    Why not:
    1. do an (not insignificant) incremental upgrade that would benefit all users ie. the OS3
    2. release a new set of hardware so the new customers have something with should last the next 18-24months.
    3. the original 3G owners will get their desier in 6-12 months – proper resigned iPhone v4

  17. Grawlix says:

    Oh, it’s all AT&T’s fault !!! Oh no, it’s all Apple’s fault !!! Boo hoo !!! No – the truth is, it’s YOUR fault.

    When you SIGN A CONTRACT you should make sure you’re aware of the Terms & Conditions, and the total package price. Your AT&T contract actually included details of the total 24 month cost of your handset and plan. Anyone who didn’t take the time to understand what they were entering into has lost their bitching rights. They are too stupid to own a sophisticated device like the iPhone, and should just buy a Windows Mobile device and live in misery.


  18. yes says:

    Just because it wasn’t totally redesigned doesn’t mean that they spent 0 on R&D. They may have invested a lot in R&D and ultimately gone with the old design.

  19. Brad says:

    by the way don’t worry the phone will only cost you a little more thanks to this


  20. tayker says:

    There’s an article around that says it costs Apple ~$200-300 to make an iPhone, which I’ve never seen contradicted. For the 32GB iPhone that’s a $400+ profit.

    Granted, there’s more flash storage in the 32GB iPhone. However, since Apple buys a ton of that flash in bulk then the cost becomes miniscule to a multi-billion dollar company. Plus, that cost is divided among all of the product lines that are using it.

  21. Justin says:

    I just did some math myself for my blog and most people can upgrade at the full discount between 12 and 18 months into their contract depending on how much you spend per month. The average iPhone bill of about $90 (pre tax) will get you a full discount after 17 months.

  22. tami says:

    One of the replies to the Gizmodo article suggests that if you, like I did, bought the first gen iPhone on day one and kept it till now… then you can receive the subsidized price for the newest iPhone.

    That said, I must not be that much of a geek. I haven’t found that my first gen 7GB phone is not enough for me. Hell, I’ve got 3GB left to go…

  23. dasein says:

    If they’re selling fast, then they’re either correctly priced or UNDERpriced. You don’t set a price based on some mathematical notion of ‘fairness’. Secondly, it’s important to remember that it’s less a case of improperly priced as improperly named: it’s only 10% phone. Considering it’s able to do so much more (now, close to what Garmin systems do– how much is that?), that’s why people pay the price and it’s selling. Finally, there are massive costs to be recouped. The old example is that the first widget costs $1,000,000, but each of the rest cost only 0.02 (so I won’t buy the first one is a joke, not a real option).

  24. Matt says:

    Ok I dont have an iPhone, i got an itouch when they came out. I was very happy with
    my cell phone at the time and wanted the itouch for the fun factor.
    i have payed for all the version updates.(they are not free like iPhones are.)
    I did not need the iPhone 3G when it came out since i was still getting along with my cell phone.
    Now that the 3Gs is coming out i am ready to switch. Why you ask? is it for the size?
    the speed? the network? nope it’s the fact that i need it. and i can justify the cost for the features that i need and will get.
    Am i willing to send the 199 for it, sure that is reasonable. The Razr was about 190 when it first came out years ago.

    Why don’t i get the 3G for 99? it’s not because the camera is so much better in the 3Gs. it’s not because it’s 16gig ( i have not filled my 8gig itouch)
    Because there will be some hidden feature that I will want that the 3G will not have.

    Bottom line is this If you want the 3Gs and can justify spending the money to get out of the contract or what ever then buy it. If you can’t then why not wait until your contract is up?

    Maybe Apple and AT&T should think about leasing the iPhone like they do with cars.Then when the new model comes out you just hand it over and just pay
    a monthly charge to use the iphone.

    This device is really the first device i have seen where people are so animate about getting the new one when there old one works fine. Do you do that with laptops or TV’s or Girlfriends?

  25. Shaun says:

    It’s this entitlement attitude that make me sick to the core. Bunch oh whiners.

  26. iShervin says:

    Agree Dr… Agree…
    we have the exact same problem with O2 in UK… and it’s a LOT more expensive in here…

  27. WFT says:

    I think your math may be off, but I don’t dare try myself. Besides it doesn’t worry me (I don’t have an iPhone yet 😀 )

  28. Bill says:

    I think you are grossly underestimating the cost. This estimate, after an additional $50 for something called IP royalties, has it at $224.33 just for the 3G — and have we priced in all the “free” software that comes with it? Apple’s margins, while healthy, generally are not +50%.


    And now for Economics 101:

    Cost and price have no correlation, so to ask that the price be lowered so that it is more in line with costs is to think that there is some inherent market price that something “should” be. All prices are merely bids that are supported by consumers. As a producer, one hopes that the bid price rises above costs; if not, then that says it’s time to get out of that business – nobody wants it bad enough to support its production. If the bid price rises far above costs, then that indicates Demand is exceeding Supply, and hopefully that profit margin will attract more suppliers to boost supply allowing bids to fall until additional suppliers are no longer attracted to the market. Suppliers can still wring out additional profit by further reducing costs but that does not obligate the supplier to then reduce the bid price; that would lead to shortages because additional lower-paying demanders would be able to enter the market and buy from a (in the short-term) fixed supply of goods, and it would also kill the incentive to reduce costs.

    Nothing says that an iPhone “should” be priced at $50, $400 or $1000 except that there are an X number of consumers willing and able to bid an X amount of dollars and Apple is willing and able to provide X amount of iPhones at X price. The ideal price would be the highest bid of the greatest number of people, so that if 10 people were willing to pay $10 on an item that costs $5 to manufacture but 50 people were willing to pay $7 for the same item then the latter price point would be more profitable. That’s how it would be set; they would lower it to raise profitability not to bring it in line with its cost. Of course if there is a way to separate out the people willing to pay more ($10) from the people willing to pay less ($7) and charge them all what they are willing to pay, that increases profits more. (Coupons perform this function. So do enthusiast “add-ons” – say, pin strips on cars or highly priced concession items to go with the movie ticket. So does having a product, like an iPhone, for every price point.)

  29. Stephen says:

    Oh, you’re not a whiner. Just impoverished. Always want, want, want. You really think Apple is screwing you? Cell phone models change almost daily with new features and so such, and none of them hold their value for long.
    Keeping up with the Joneses gets expensive. It’s better to be patient.

  30. Larry says:

    You forgot the other factor: Apple is AT&T’s PARTNER. AT&T wanted an exclusive arrangement, and AT&T makes money by selling mobile phone services. Therefore, it’s to AT&T’s advantage that the price of the iPhone is high enough that people will say, “Gee, I may as well get the phone service as well and get the cheaper price” rather than buy the iPhone for $430 or $500. So the price isn’t so much Apple wanting to make a profit, but it serves as a deterrent to NOT buying AT&T’s services.

  31. Dylan says:

    There’s a factor I don’t see anyone else mentioning and that is the legal aspects of this. Even if the iPod touch was identical to the iPhone and simply had the phone turned off, because it is not a phone it would not cost as much for Apple or AT&T to market.

    It doesn’t cost 99 cents every time you download a song from iTunes or Amazon, the research and development is already done (such as it is) and there is no way in hell the system overhead for that action costs anywhere near 99 cents, but those companies have to pay royalties. With phones, every carrier is paying a lot of overhead, and it some of it shows in the cost of the handset, which incorporates all kinds of required-by-law stuff to make the communications device work in all those countries. The iPod touch has a wifi card.

    So, it’s not Apple or AT&T, it’s the US Government. Like usual.

  32. DJ says:

    As consumers, we all want to pay as little as possible. But, as a company, if you can sell as many widgets as you want for $N, why would you charge less than $N? I think the business rule is “charge what the market will bear”, or something like that.

Leave A Comment


Click here to inquire about making a fortune by advertising your game, gadget, or site on Macenstein.