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iPhone 3G Upgrade Policy Makes Sense

John Gruber over at Daring Fireball doesn’t get why AT&T subscribers who don’t currently have an iPhone will have to pay more to get the iPhone 3G next Friday.

It’s simple: now that the iPhone 3G is subsidized, AT&T is treating it like every other phone they carry. Let me explain:

AT&T subsidizes the price of every phone it carries, by about $200. So that RAZR phone you got a few months ago for free was actually about $200. You’ve probably seen these un-subsidized prices if you’ve ever damaged a phone and had to purchase a new one at full price.

The idea is that AT&T will make up that $200 over the course of your two-year contract. So about $8.33 per month goes toward paying down that subsidy. When you get toward the end of two years, you’ll be eligible for an upgrade, which is essentially the ability to purchase a new phone at the subsidized price, as long as you commit to another two-year contract.

Maybe not the most ideal plan in the world, but it keeps the apparent cost of mobile phones low, and gets people in the door.

When the original iPhone came out, the arrangement was unique: AT&T wasn’t going to subsidize a cent of it in exchange for some flexibilities they allowed to Apple (such as at-home activation). Since there was no subsidy, AT&T lifted the “upgrade” policy for existing AT&T account holders, and allowed them to purchase the iPhone at the standard retail price everyone else paid.

But the iPhone 3G is indeed subsidized, and so the upgrade plan is back in effect. If you currently use a phone subsidized by AT&T, and you aren’t currently eligible for an upgrade (you aren’t nearing your contact’s two-year anniversary), you will need to pay the full, un-subsidized price for the iPhone 3G. In this case, that works out to either $199+200 or $299+200, hence the $399 and $499 prices.

If you already own an iPhone, AT&T doesn’t need to get back their lost subsidy, so you get to pay the standard $199/$299 price.

Hopefully, this clarifies things a bit.

UPDATE: The new iPhone 3GS coming out has a similar policy, except that there is no grace for 3G owners since the 3G, unlike the original iPhone, is subsidized.

If you’re not near the point where you’ve paid off your subsidy — and usually that means being more than 18 months into your plan — you’re not eligible for an upgrade at the subsidized price. You can purchase an early upgrade for $200, which is essentially paying for a significant part or all of that subsidy, or you can purchase a plan- and subsidy-free phone for a $400 premium.

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Avatar of M. Jackson Wilkinson

I'm M. Jackson Wilkinson, a technologist, designer, speaker, educator, and writer in San Francisco. I'm the Founder of Kinsights. I'm from Philadelphia, went to Bowdoin College in Maine, root for the Phillies, and love to sing.

Entry posted from Pearson Square Apartment

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Comments

  1. When the original iPhone came out, I was sans contract over at Verizon. I had heard some horror stories about AT&T and didn’t want to tie myself to them for 2 years without testing the waters. So I took in a perfectly good phone that I bought on eBay and asked if I could activate without getting a contract. They said why sure they could do that, but if I signed up for a contract I could get this brand new RAZR for free and I could test out the service for 30 days and bring it back, no questions asked. They assured me over and over again that I could buy an iPhone at any point and just extend my contract from there.

    But here I am 12 months later facing an extra 200 bucks if I want to get an iPhone. And what do I have to show for it? A RAZR that wasn’t even worth 200 bucks 12 months ago.

    Maybe I’m just furious that I fell for the salesmanship of the AT&T store employees. But I feel like I’m getting ripped off by AT&T. They didn’t HAVE to get my money for the last 12 months. THEY were the ones insisting on giving me a phone that I didn’t even need and haven’t really used.

    And, if they let me upgrade to an iPhone right now, I’d be paying them at least $35 more a month. Over the course of the 12 months I still have remaining on my contract, that’s $420 extra that they could get from me if they let me upgrade now. They’re going to be paying the same subsidy whether it is now or next July, so why not get the extra $420?

    I’d probably just swallow it and pay the extra if it was only $100, but $200? Not when you look at what my monthly bill would be as well! The salesperson I spoke to last week said they have a lot of leeway when it comes to doing early upgrades. I don’t know if that is going to be true with the iPhone, but perhaps they’ll be able to throw in a bluetooth headset and case and I’ll still bite. But likely what will happen is one of the following:

    • I’ll wait until I can upgrade and get the iPhone
    • I’ll find a used iPhone (perhaps from a friend who is upgrading) and activate that (if there are still the cheaper EDGE-only plans available)
    • I’ll wait until my contract is up and look at all the shiny new Android phones that will be out by then
    • I’ll get a jailbroken iPhone and activate it with another carrier

    I don’t see how any of these scenarios makes financial sense to AT&T and the last two just flat out hurt them. I would think they’d want to get as many people as possible happy in iPhone contracts so that we don’t stray. So explain to me besides “This is the way cell phone subsidies have always worked” why this policy makes sense and I shouldn’t be upset, because I just am not seeing it.

    • Ryan
  2. of course you’re quite right about all of this. my thoughts aren’t that this isn’t reasonable, only that i wish there was another way. i was so excited by the direction apple was taking the industry (in the most general possible sense) that it was a huge letdown for this (albeit fairly minor) to pop up with the release of 3g. i fully understand it, and if i were them i’d probably make the same decision. but oh how nice it would be if it weren’t so …

  3. Shouldn’t you bring your old phone back when upgrading?

  4. @acosta: I can’t think of any realistic scenario where an existing AT&T non-iPhone subscriber could pay $199 for the 3G unless AT&T was giving you a $200 gift. If they did that, I imagine I’d be pissed about it as a stockholder.

    The only dream-world scenario where it makes business sense for AT&T not to charge the increased price would be a world where mobile carriers don’t subsidize in general, but then everyone would be paying $399/$499, just like with the original iPhone. I actually wish we hadn’t gotten on this path where folks think phones really are free, when they’re in fact relatively expensive pieces of equipment.

    @Gleb: I’ve never turned in an old phone when I’ve upgraded. They don’t want them, and I’ve come to use them once in a while when I needed a backup or when a friend damaged theirs. I think you do indeed own the phone when you buy it — it’s not like renting a phone terminal from Bell back in the day or anything.

  5. Well, there was an obvious loophole is someone planned ahead. AT&T allowed anyone to switch to an iPhone from their original plan, regardless of how long you were into it. So, a smart person could have gotten a new phone from AT&T, switched to the iPhone, and now be eligible for a subsidized upgrade.

  6. There is also may be an additional cost due to the phone being subsidized. In California, you pay sales tax on the unsubsidized price of the phone AT&T also announced that that price will be $400 above the fully subsidized price. Depending on your location in California, that will result in an addtional cost of $29 to $35 above the activation and normal sales tax.

  7. I’m confused…. I have been an AT&T customer, in good standing, for 10 years now. I have always signed up for new 2 year contracts. I have become eligible for upgrades at terms ranging from 6-9 months after signing a contract. It has NEVER been 2 years. It has never even been a year. I think most people who got ANY free (subsidized) phone from AT&T in the last 9+ months AND PAY THEIR BILLS will be able to get the iPhone for $199

  8. @Cohen: I was sorta in that boat — I had my Blackberry 7105 replaced under warranty about two weeks before I bought an iPhone. Never got off my butt to sell it or anything though. But if you know anyone…

    @Ryan: I’m sure the AT&T rep a year ago wasn’t telling you anything they thought to be false — no one knew that the deal was going to change. I don’t claim that AT&T has the best, most consumer-friendly policies in the industry, nor do I claim they really get it, but it’s not particularly confusing. If your RAZR is reasonably new, you can probably sell it for at least $150 on eBay, and there’s most of your difference.

    @Alan: I read that news about the higher price for the contract-less iPhone differently. The unsubsidized price is actually the $399/499 level, but AT&T is charging more (beyond the subsidy) to those who won’t commit, basically as a fee for breaking the AT&T exclusivity agreement.

    @Eytan: Yeah, I sorta know what you mean. I seem to have a vague recollection that back in the day, AT&T (or CellularOne, which I was with before they merged into AT&T) had a policy that you were always allowed to upgrade. Then they switched to the industry-standard model certainly by the time I was moved to Cingular. Can’t be sure about this, though. Those fees can always be waived, so make your case and see if you get a nibble.

  9. @MJW actually you cant say that “the unsubsidized price is actually the $399/499” either, because this scenario also requires a 2 year contract as AT&T have to still allow some amortisation of the remaining subsidy they gave on the original phone.

    i think we will find (if it is ever revealed) that the true unsubsidised price is somewhere between $399 and the $599 no contract price. my guess would be somewhere in the high $400.

  10. I’m not entirely certain this is right. I bought a new (subsidized) phone along with my iPhone back in October-ish when they dropped the price. So according to this article, I shouldn’t be able to get the discount, since I’m technically in a 2-year agreement and I used my subsidy on that other phone (which I sold on eBay). When I go to att.com/iphone and click “check upgrade eligibility,” I log into my account and then I see this:

    “This line is eligible for reduced equipment pricing when you sign up for a new 2-year service agreement. All iPhone purchases require a 2-year service commitment.”

    I don’t think it’s a blanket “everyone under any kind of contract can’t get a discounted iPhone;” AT&T would have fire and pitchforks if they tried to pull that. I’m going to call and verify later today, but I’m pretty sure that I’ll be getting a 16GB for $299, at least according to this website.

  11. @Chad: Interesting. I wonder if that message on the website is based on the fact that the device listed as your current device is an iPhone. I can see the system logic being that if your handset is an iPhone, they show eligibility as being true, otherwise check the status of the contract.

    It could just be a bug in the system which works out in your favor, or it could be something more complicated than that. Post back if you find anything out — I’m curious to hear the story.

  12. Great explanation! It’s unclear what will happen in 2009 but this is a good starting point for that discussion.

  13. @cohen but that’s still the case. people with the first generation are automatically eligible for the subsidized price. at best, first gen owners are only 1 year into a 2 year contract. i just logged into my ATT account and checked eligibility “This line is eligible for equipment discount pricing when you sign up for a 2-year service agreement. You can take advantage of our no-commitment pricing option, with the exception of iPhone which requires a 2-year commitment.”

  14. @mark: What Cohen is saying is that if you bought a brand new subsidized phone from AT&T in June of last year, you could have then bought an iPhone two months later and gotten on the iPhone plan. You would now be eligible for the 3G subsidy even though you haven’t finished off the initial 2 year contract. So, if I was smart I would have bought an iPhone 6 months ago or whenever. I would now have an iPhone and a subsidized RAZR that I could both sell on eBay and likely make a profit. Instead, since I didn’t go that route I’m still serving out my initial 2 year contract due to a subsidy and not eligible for the 3G subsidy. So, that is definitely a loophole (or just a shrewd business move). It gets even more loophole-ish since AT&T is offering refunds/free upgrades to people that bought original iPhones in a certain time period.

    @Eytan: You’re correct. I checked my date, and it says I’m eligible for the subsidy on 3/13/09. That would be 4 months early from when I bought my RAZR on 7/13/09. So adjust my math in my previous post by 4 months and my argument isn’t as strong.

    And my understanding is that AT&T associates traditionally have a fair amount of leeway in granting even earlier upgrades. However, since policies and fees on the iPhone are so specific they might not have the same degree of power to bend the rules that they have had in the past.

    @Wilkinson: I know they weren’t intentionally deceiving me, but I still feel like an idiot since I went in with a specific plan in mind NOT to get roped into a contract and it still happened - and here I am paying the price for it.

  15. HEY, WITH YOUR LOGIC THEN I SHOULD PAY THE DIFFERENCE OF THE COST OF MY CURRENT PHONE AND THEN I WOULD BE OK GETTING THE IPHONE.

    THAT IS, IF I HAVE 6 MONTHS LEFT ON MY PHONE CONTRACT, I SHOULD PAY 6 X 8.33 AND BE OUT OF MY CONTRACT AND ATT WOULD BE HAPPY TO GIVE ME A NEW SUBSIDIZED IPHONE.

    C’MON DID YOU THINK OF THIS?

  16. @Marco: While it’s usually my policy to ignore anything written in caps, if I don’t moderate them away, you make a half-decent point here.

    However, the goal of the subsidy is to shield the cost of the phone from the consumer. If you were to be explicit about how the user pays down the subsidy, it would be more apparent that the cost of the phone is built in, and less of a shield.

    Not a consumer-friendly policy, no, but certainly sales-friendly, except in this case.

  17. YOU CAN SAVE $25!!! If you cancel your existing ATT account (it will cost you $175) and sign up as a new customer (getting the iPhone for $199) you will save yourself $25. Either way, ATT will be making more than $720 from you than they would be normally ($30+ X 24 mos) if you get a new iPhone.

  18. I think the “hidden” costs that come with the increased monthy rates are going to really annoy people in the coming months. Having said that, I’ll probably take the plunge and get a 3G anyway. This video at least showed how easy it is to upgrade: http://www.monkeysee.com/play/10498-how-to-upgrade-to-the-iphone-3g

  19. honestly the real problem is that at&t and apple choose not to inform people of the pricing for uneligible customers. Steve Jobs said in his keynote presentaion that the number one reason people did not get the iphone was because of its price, so they cut the price by $200. But then you find out its not true but only for new and eligible customers, wtf, then $10 bucks more a month for 3g really, they weren’t charging that before, and then $18 upgrade fee, does no one else annoyed by this?

  20. I think the AT&T iPhone 3G upgrade policy is unfair. A year ago I started a new plan, paid $80 for a phone and got a $30 rebate. So I assume the AT&T subsidy was just $30. Now they want me to pay a $200 fee to upgrade. As I understand things, it would be fair to make me pay off the rest of the subsidy on the old phone (about $15) and then start fresh with the iPhone 3G. The price of a new phone should not be determined by the price of an old phone because they are independent.

  21. @Doug: I think your assumption is wrong there. I’d guess their subsidy is still $200, and they gave you back $30 of it, so you are effectively paying off $170.

    Yeah, it’d be nice for the user if you could see how much you’d paid off your subsidy, and maybe then you’d only have to pay a $70 early-upgrade fee or something, but it’d be bad for marketing from their perspective to make it more obvious that you’re paying later for the cheaper phone now.

    If I were them, I’d side with the user, but we all know how companies like AT&T tend to fall on those issues.

  22. I just signed up with at&t as a second line on my mothers account with the assumption that when the ipod came out I would just switch over. I have had their service for only one week. I did not realize that only NEW customers got the special price of $199. Is it too late for me to send this phone back and get the iphone at the special price. Like I said, I have only had this phone and new service for a week!

  23. Its a scam… $100.00 they wanted from me at point-of-sale for an early upgrade fee. why? why do I need to give you $100.00? We all accept these ridiculous fees. I hope the net rips them apart for this. Now that everything is out and on the table. $100!!! + $18 for activation? I’m a student, i work hard for nothing lol. And my contract is eligable for an upgrade in 1 MONTH!!! that just was the icing on the cake.

  24. Eytan- I was thinking the same thing. I’ve been with At&t for 10+ years too & even tho I signed up for a 2 year contract I was always able to get a free phone or discount on an upgrade in a year.

  25. Can you make sense out of why they’re making existing AT&T customers sign new 2 year service agreements to activate a handed down original iPhone?

  26. I still think subsidizing phones is a bad practice. The problem with this is they claim that the original handsets costs a lot more and they try to recover it through the two year contracts but

    1. Do they subsidize every phone with 200$? I don’t think every phone requires that huge of a subsidy? The discrepancy that the subsidized one costs $199 and the unsubsidized one costs $499 indicates the subsidy is not 200$?
    2. Why don’t they give the amount of money they are subsidizing upfront in the monthly bills? After all we are still paying them in two years! I don’t think SUBSIDY is the word for it, rather its a CREDIT.
    3. Are they including discounts they obtain from the manufacturers and passing it on to the customers?

    Maybe with the current explanation the upgrade policy makes sense but the whole subsidy stinks!

  27. All of that rationalization won’t undo the ill-will they are creating by giving anyone who walks in without existing service a better deal than a long time customer who is willing to pay the same $199/299 and sign up for an additional data plan and a new 2 year commitment. It just doesn’t make any sense from a marketing perspective to alienate a portion of your existing customer base. I’ve been all the way up their customer service chain, and they won’t budge. I for one will go shopping for another service provider when my current agreement is up in another 5 weeks.

  28. I can appreciate the need to recoup cost for subsidizing the phones. What I can understand it treating the phone any different than others. For example, I had the first I phone and it was lost. I wanted to get the 3g but am not eligible for an upgrade until Dec. I have always had wireless companies allow upgrades a few months early. I was told by AT&T that they could not authorize and early upgrade on the I Phone, but could if I wanted to purchase any other phone. This makes absolutely not since to me.

  29. The policy is illegal and I hope there will be a class action law suite. I have my original contract, which says nothing about extra costs for upgrades. I joined at&t in July 2007 when the iphone came out, but took a cheapo phone (waiting for the 2nd edition before buying). The policy then was, “you can upgrade with a new 2 year contract.” Nothing in my contract says otherwise. Now, a bit over a year later, I want to upgrade but I can’t without paying thru the nose; at&t changed their policy after my contract was signed.

    When my contract is up, I’ll be glad to switch companies. This policy damages Apple as well as att.

  30. Oh, don’t be dramatic Tom. I dislike AT&T for stupid policies as much as anyone, but this has nothing to do with anything contractual. AT&T has the right to make a sale to anyone under any circumstances they set, and your contract has nothing to do with it. Nonetheless, there has ALWAYS been a notion of an account being upgrade-eligible.

    I went back to my original terms I had from when I signed on with Cingular (which was then bought by AT&T), which has this to say about upgrade eligibility:

    • You must either be out of contract with Cingular (i.e., you’re on a month-to-month agreement) or have less then three (3) months remaining on your existing Cingular contract.

    • You must have a good billing record with Cingular with no outstanding balances or late fees.

    • You must agree to extend your cell phone contract by 12 or 24 months (depending on the type of upgrade/extension you choose.)

    What you’re probably right about is the fact that the policy damages Apple, since people seem to be willing to blame anyone when they don’t get what they want…

  31. Literally every single person in that room when Apple announced the iPhone 3GS pricing had an iPhone 3G. I think they should have taken that audience into account and explained things a little more clearly, instead of throwing out those ooooh and ahhhh price points and letting us discover later that non of us early adopters qualify. It just FEELS shady, even though it makes sense.

  32. AT&T won't upgrade me from a cheap $30 go phone to an iphone:

    http://tinyurl.com/mgcrmn

    They are being a pain with business customers also (see bottom)

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