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New iPhone Likely Not To Be Subsidized

A couple of weeks ago, AT&T's CFO Rick Lindner made some comments that raised the idea of subsidies for the 3G iPhone. Some think the price of the new hardware might be as low as $200. Analysts say no way, Jose. Is AT&T's 3G network playing a role?

Right now, the iPhone costs $400 for the 8GB model and $500 for the 16GB model. These are (what many believe to be) completely unsubsidized prices. In other words, Apple is getting you to pay full price for the device. Apple's carrier partner, AT&T, subsidizes just about every other handset it sells. That means customers get the benefit of better hardware at a lower cost. List prices for smartphones such as the Motorola Q9h, for example, are well over $500. But it can be yours for $250 if you agree to sign a two-year contract with AT&T.

Many will remember that the iPhone cost $500 for 4GB and $600 for 8GB when it was first released. Prices were slashed in September (to much disdain and outrage) to the current pricing model. While the iPhone remains to be a very expensive device, other devices have entered the market that undercut it by quite a lot. Touch screen phones from the likes of LG, Samsung and others fall in the $150 to $250 price range, while still providing similar functionality. Based on Lindner's comments, many have speculated that AT&T and Apple will subsidize the 3G iPhone to be competitive with these other devices. Roger Entner, analyst with Nielsen, disagrees.

He told RCR News, "There's no need to upgrade the device's capabilities and lower its cost at the same time. AT&T Mobility first will have to see the effect that a 3G iPhone will have on its HSDPA network. Right now, that HSDPA service is robust, with only a few million laptops riding on it. Add a few million iPhone users, who are heavy users of the Internet, and it could be like shaking a skyscraper. AT&T Mobility is not just selling a device, it's selling a service. AT&T Mobility doesn't want complaints about its service. That would spell out no abrupt price subsidy for the device." In other words, AT&T will keep the price high to prevent too many people from signing up.

But this raises another issue. Remember last week's rumors that there may be limited supplies of the iPhone at launch? If AT&T is indeed worried about the veracity of its 3G network, Entner's comments make perfect sense. AT&T boosted the capabilities of its 2.5G EDGE network mere weeks before the iPhone's launch on June 29, 2007. It is doing about the same thing this year, completing a necessary upgrade to its 3G network just ahead of the supposed launch of the 3G iPhone. The timing (two years in a row) is awfully curious.

It is striking, though, that AT&T would be scared about the limitations of its network. If there's one thing AT&T should be supremely confident about, it is the strength of its own network. If the iPhone will be available in limited numbers at launch to prevent it from usurping 3G network capacity from laptop users, that's a telling sign indeed.

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