jonathan kressaty

In my usual daily perusal of the 'net, I noticed yesterday a splash of articles (read TUAW's here) that were mentioning a "possible June release" of the next iPhone. I thought to myself "well duh, of course there will be a new iPhone in June." After considering the absurdity of this assumption, I thought it out and have what I feel to be a decent argument. Let's start with some background.

The traditional cellular phone market (at least here in the U.S.) has thrived and built up a very interesting business model that has proven quite successful. You go to the wireless carrier's store of your choice, pick out a phone, and sign a contract. By signing that contract and saying you'll pay their monthly fee for 1-2 years, they'll knock down the price of a handset for you. This lets you get the latest, greatest phone for an affordable initial output of cash, and nets the carrier a decent chunk of your paycheck for 24 months.

The carrier, then, has to amortize the cost of your handset's subsidy over a period of time. I'm guessing for accounting purposes this varies from carrier to carrier, but let's say it's over the full 24 months. This means that if you got $200 knocked off your phone's price tag when you signed that contract, $8.33 of your monthly bill is being written off to cover that hardware cost to the carrier. Simple enough.

So let's look at the iPhone. With a new, 2 year contract, a 16 GB iPhone will run you $299. WITHOUT a new, 2 year contract, a 16 GB iPhone will run you $499. So in essence, AT&T (and Apple) are giving you a $200 subsidy on the phone. Same story as above. $8.33 of your bill each month goes to that subsidy. If you break contract, you pay AT&T $175, which is essentially going to cover the cost of that phone.

So here's the motivation behind it - AT&T pays Apple a fee (rumored to be a lump sum, but might be a monthly based on the number of phones being used) for the iPhone that you're paying a monthly service fee on. It's obviously in both parties' best interest to keep you as an AT&T subscriber for as long as possible. However, AT&T doesn't want you upgrading your iPhone ever 2 months when Apple does slight hardware revisions, as they tend to do, since you're only extending your contract by a small amount. Instead, Apple releases a new phone every 12 or so months - long enough for AT&T to cover half of your subsidy, long enough for Apple to make their 12 monthly commissions, and long enough for it to be worthwhile to AT&T to let you extend your contract early (normally you must wait the 2 years). Now, since there isn't really a viable alternative to the iPhone, AT&T has you locked in as a customer until someone releases a better handset (or until their contract with Apple expires in 2012).

Some considerations - does the iPhone really cost AT&T/Apple $499? Hell no. iSuppli puts that sucker at about $173 to manufacture. As far as accounting purposes go, who knows how AT&T handles this, but they probably book it as the full retail of the phone seeing as they're not the manufacturer. But in the end Apple has a guaranteed revenue stream (for now) from the approximately 34 million iPhones glued to hands and ears all over the world.