AT&T’s Value to iPhone Users: Negative $400/phone?!
The value of AT&T’s service on the iPhone has been set at negative $400/per phone. This valuation is not from over-entitled iPhone users. It comes from AT&T and Apple.
Recently, AT&T and Apple started selling iPhones without a service contract for a $400 premium. Given the recent high profile problems at the SXWSi trade show and complaints from the media, apparently the two companies feel there is a market for iPhone users willing to pay a premium to not have their world delivered by AT&T.
Why This is News: Apple is coming out with a new generation of the iPhone, and wants to clean out the existing inventory. Typically, when a handset model is about to be replaced, the price drops significantly. Sometimes, the buyer even gets paid to take the phone (with a contract). It is interesting that rather than discounting the handset, AT&T and Apple think they can clear out inventory at a premium by losing AT&T. In a bad economy, this speaks volumes about AT&T’s perceived value.
Why This Matters: Presently, AT&T has the exclusive right to sell iPhones in the United States. But its exclusivity will eventually end. AT&T should be using its exclusivity period to build customer loyalty and ensure that they keep customers once they have the choice of carrier. Best case scenario for AT&T would be happy customers that would want to stay with AT&T even if it did not have the iPhone. However, it would probably be good enough if customers thought that AT&T was an important part of the the iPhone experience that they will stay with AT&T when they upgrade their iPhone. If customers are not loyal to AT&T, it risks a serious price war on the cost of the handset and monthly service on newer versions of the iPhone.
The Bottom Line: Right now, it seems clear that customer loyalty lies with Apple. AT&T has announced upgrades and investments in its network that will become available later in 2009. Only Apple and AT&T know when the exclusivity period ends. So perhaps, AT&T will clean up its act before the end of that period.
But, I suspect that its real ace in the hole is the fact that even after the expiration of the exclusivity period, customers will only have a limited number of choices for wireless service providers. Moreover, the other three 3G service providers are likely to follow a similar short-term business model when they sell the iPhone. As typically happens when marketing and customer service are ignored, it won’t end well, as we will see my next post: This is the iPhone’s Business Model on Crack.
Written by Rob Adler
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Tags: Apple, AT&T, Blackberry, CTIA, iPhone, iPhone 3G, Sprint, SXSWi, T-Mobile, Vantage Communications, Verizon Wireless
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May 11th, 2009 at 5:55 pm
“Moreover, the other three 3G service providers are likely to follow a similar short-term business model when they sell the iPhone.”
Who are these “other 3G service providers”? Verizon and Sprint uses CDMA technology, as opposed to AT&T which uses UMTS. T-Mobile uses UMTS technology for 3G, but not on the same spectrum as the iPhone is designed. Also, T-Mobile has their thing going on with the Google phone (G1). Please fill me in…
May 11th, 2009 at 10:53 pm
Pablo,
Thanks for the comments. I was referring to the business model of subsidizing the purchase price and making money charging for service.
The various access technologies pose a different challenge for Apple to redesign the phone to work on CDMA or T-Mobile’s spectrum. That is a barrier to Apple breaking ATT’s exclusivity. It would not surprise me if Apple waited until adoption of 4G before including VZW, Sprint or T – especially if they can get AT&T to pay dearly to maintain exclusivity.
May 12th, 2009 at 10:26 am
I doubt if there is anything ATT can do to retain these customers. For many iPhone users it may be time to upgrade to a newer version (or perhaps to a phone not so scratched and dented). The competing CDMA carriers will probably do a better job at providing real 3G speeds; but in the end Apple is playing the carriers for what they are: bloated, dumb bureaucracies that do a better job at network “plumbing” than creating a compelling environment for savvy wireless users. In the end wireless services will become a commodity service with the lowest price point winning the day. The carriers are simply huge collectives of project managers with a billing system tacked on the side. Technology, business smarts and innovation? That’s Apple’s domain.
May 12th, 2009 at 12:11 pm
There is another side to this the cost of iPhone that both at&t and Apple may be missing in their assessment, handset churn.
The iPhone is simply not a very durable device. The iPhone gets repaired/replaced under warranty one to two times a year for many users, let the extended warranty lapse and the iPhone is likely replaced by a non-iPhone at the earliest opportunity. How many customers churn away from the iPhone to another at&t phone? How many simply churn away from at&t because of the iPhone experience. The cost of churning a customer to another carrier is high, in many cases they will not return because of their perceived problems wiht the handset and carrier support.
When will carriers make handset manufacturers bring their warranties in line with the typical lenght of contract? 20 years ago the business model was to sell minutes, today the business model is to sell accessories bind the customers into contracts that last longer than their equipment.
-WE
May 12th, 2009 at 12:53 pm
Joe: No doubt about it. Churn is very expensive – especially given the subsidies and customer acquisition cost. It flies under the radar because the numbers are not generally avaialble. We had a client calculate the cost of churn relating to poor voice quality. It was in the billions.
Wireless Engineer, Great point about the warranties. Right now, for the popular phones, the balance of the negotiating power is with the handset manaufacturers. It might be different for the cheap phones, but it would mean a price increase to cover the warranty costs. Given price sensitivty, that probably is a deal breaker.
May 21st, 2009 at 10:37 am
Amen Brother! 11/19/09 will end my relationship with At&t and the iphone because it is unacceptable to me to spend a minimum of one hour with customer support to get 1/2 of any problem I bring to them resolved. Thus, it is 2 hours of my time to get a nominal problem resolved.
May 21st, 2009 at 10:44 am
I hear you. AT&T is the only people that are surprised by the call volume to customer service.