Apple's lucrative iPhone revenue sharing goes away, replaced with "traditional" model

AT&T (well, Cingular at the time) and Apple entered into a very peculiar marriage of convenience to bring the original iPhone to American airwaves whereby AT&T shelled out cash to Cupertino each and every month for iPhone subscribers on its network (the exact terms were never publicized). Very simply, Apple had something good; they knew it and leveraged it to the very maximum of their ability, dangling the tantalizing prospect of endless publicity and droves of new customers in exchange for the deal. That same logic left Apple struggling to find partners in Europe, though, ultimately deploying the 2.5G model in just five markets there under AT&T-like terms.

Fast forward to July 2008 and the iPhone 3G, and the picture has changed just a bit. At least 70 countries will see the updated version before the year's out, but why the sudden change of heart by the world's carriers? Turns out the answer might lie in a revamped sales model that more closely mirrors the deals carriers set up with other manufacturers. AT&T has gone on the record saying that it'll take a huge revenue hit -- 10 to 12 cents per share both this year and next before finally planning on profitability in 2010 -- in order to deeply subsidize the phone on its own accord, taking Apple and its precious monthly kickbacks out of the picture. This is presumably the same kind of setup Apple is offering to carriers around the globe, a setup that they're already well acquainted with that provides a clear path to black ink (or so they would hope, anyway).

What does this mean for Apple, then? There's some chatter that the move away from a monthly revenue model will "force" Apple into charging for firmware updates much the way it does for the iPod touch, but that's not really a valid train of thought. We already know that Apple's committed to updating iPhones at no charge, something it can do by virtue of its accounting model where it recognizes revenue from the sales of devices over time. That accounting model was chosen precisely because it looked best on paper while Apple was continuing to churn out fee-free upgrades, not because of the original revenue model in place with AT&T. For what it's worth, they're still going to be rolling in the dough; carriers, on the other hand, are going to be waiting a while to dig out of that deep subsidy hole.

[Johan S @ Jun 9th 2008 6:19PM]

Assuming you already have regular cell phone service (this is america we better all have cell phones), the total added cost of new iPhone:

$199 + $30 (monthly cost of additional required AT&T data plan) =

$919

So compare that $919 with the cost and features of HTC Diamond, Sony Xperia X1, or even the Blackberry Bold .. maybe it's not that great of a deal IMHO.

[Blue @ Jun 9th 2008 6:21PM]

won't those phones also require a data plan?

[Jeremy K. @ Jun 9th 2008 6:22PM]

Correct me if I'm wrong, but don't all of those other phones require a roughly $30 data plan?

[CraigJ @ Jun 9th 2008 6:24PM]

Jeremy - that's crazy talk right there...

[Johan S @ Jun 9th 2008 6:37PM]

First, they don't REQUIRE a data plan.

Second, the data+phone plans of other carriers are cheaper ($10 more over 2 years is $240).

That's why i said compare price + features.

[jabra @ Jun 9th 2008 6:40PM]

Nice job factoring in the plan costs for those other phones dumbass

[Sean @ Jun 9th 2008 6:41PM]

the point he's trying to make is that the iphone2 data plan is $10/month *more* than other AT&T data plans. If you have an iphone now, and you upgrade to the iphone2, you'll see your monthly bill increase by $10.

[Jeremy K. @ Jun 9th 2008 6:42PM]

I did a quick research for data plans:

T-Mobile: $19.99
Verizon: $40.00

Mentioning that a Blackberry or Windows Mobile phone doesn't require a data plan is absurd. If you don't get a data plan with those phones, you might as well get a freebie phone.

Stop posting so much. I'm tired of reading your comments. Especially when you post the same comment on multiple threads.

[CraigJ @ Jun 9th 2008 6:47PM]

Really? The cheapest voice + data plan I can get from Verizon is $80. I believe that the cheapest iPhone voice + data plan is $70? ($39.99 + $30)
http://www.verizonwireless.com/b2c/store/controller?item=planFirst&action=viewPlanOverview&catType=voiceData

The cheapest data plan I can find on T Mobile is $30.

So just some quick checking tells me AT&T is a little cheaper, or right in line with the competition. If you have different numbers by all means provide them.

[John @ Jun 9th 2008 7:27PM]

Sprint beats them all with a $15 data plan

[mj @ Jun 9th 2008 7:29PM]

Or you can get SERO plan from Sprint and get Voice + Data + Text for $30 per month. Search for Sprint SERO and you will find tons of threads. I've been using it for 2 years now.

[CraigJ @ Jun 9th 2008 7:47PM]

@John. Please provide a link. The cheapest voice + data I can find is 450 minutes + unlimited data for $69.99. http://nextelonline.nextel.com/NASApp/onlinestore/en/Action/DisplayPlans

I think the cheapest AT&T iPhone plan is also $69.99.

I see no $15 data plan anywhere on the site...

[Isaac Levy @ Jun 9th 2008 8:11PM]

Uh, I can get a data plan from verizon for free. You just hack your phone to not go through their portal and it just charges for the minutes you use the internet. On nights and weekends, the minutes are free so the internet is free.

[dagamer34 @ Jun 9th 2008 10:56PM]

The iPhone 3G doesn't work on the correct 3G frequency. If you bought the iPhone 3G to use the 3G, then you're stuck with AT&T. Activating it in-store shouldn't matter to you.

Now if you wanted to export it to a European country, that's different. But don't you wonder why the iPhone 3G is cheaper than the iPod Touch in the first place now?

[Mert @ Jun 10th 2008 1:36AM]

Guys, beleive me.. I've been using HTC Touch Diamond for about 5 days now and I'm sick and tired of how slow and sluggish it is. I've already cancelled my acceory orders for it and will head back to my iPhone on July 11th... What was I thinking??? It lacks many thigns I like but man taht phone is one hell of a fast phone thanks(!) to no multi-tasking. I love Windows mobile but HTC Touch Diamond is just too slow.

[Steffen Jobbs @ Jun 10th 2008 9:18AM]

@Mert

A few of us have been trying to tell you that the HTC Touch Diamond is just a diamond in the rough (the rough being WinMo 6.1). Good looking as though the Diamond is, it's still saddled with MicroSludge's mobile OS with a touch interface slapped on top. Dump the Diamond, save some money and get a iPhone 3G 16 GB instead. You should have waited for it instead of being in a rush to get a pretty handset with all glitz and no substance.

I wish you could compare the two side-by-side to form an opinion since iPhone 2.0 firmware isn't even ready yet. We'll all be interested in your comparisons when you get the new iPhone.

[Blue @ Jun 9th 2008 6:20PM]

I figured they changed business models in order to get more phones into the marketplace, so they can make money off of the application, games, and music sales for the device.

I would buy one if they would offer it for any other carrier. ATT is never seeing a dime from me.

[AKBlade13 @ Jun 9th 2008 6:21PM]

Agreed, if they can make a CDMA version (ha) I'd get it.

AKBlade13

[Jeremy K. @ Jun 9th 2008 6:23PM]

Here's hoping that iPhone 2.0 can be cracked to be used on other carriers!

[applefan @ Jun 9th 2008 6:34PM]

I'm buying iPhone 3G, but I'm not gonna activate it. I won't activate any iPhone I ever buy until there's a CDMA version. ATT isn't seeing a cent from me either.

[Ryan @ Jun 9th 2008 6:43PM]

Reports all state that you MUST activate the 3g iPhone at time of purchase (in store) and they will NOT be selling them online.. therefore, your plan will not work.. sorry.

http://techblog.dallasnews.com/archives/2008/06/att-announces-voice-and-data-p.html

[ak @ Jun 9th 2008 7:40PM]

@Jeremy K

so you'd unlock the iphone for use in the United States, on what GSM carrier?

t-mobile has 3G data available in one market..... (NYC)

[Jeremy K. @ Jun 9th 2008 8:17PM]

I live near NYC. Plus, T-Mobile will be introducing 3G in other markets soon enough. Regardless, isn't 3G backwards compatible?

[Mert @ Jun 10th 2008 1:40AM]

RE: AppleFan

What are you talking about? stupid CDMA??? Whole world is using GSM and stupid American service providers are still servicing on the useless CDMA network. They have to wake up and smell the coffee... Before I moved to north America, I used to think this continent was ahead in the game of technology but many Eurpoe was much better.

[john @ Jun 10th 2008 12:50PM]

Actually Mert, more of the world is using CDMA than the alternative frequencies the US uses for GSM... that being said, the quadband phones will still work globally, but you can get quadband CDMA as well. I'd still rather have GSM as it has lower battery consumption, however I haven't used one with the newer 3G data yet -- I've heard it's about the same.

[zofo @ Jun 9th 2008 6:21PM]

Uhm... they have a SOFTWARE store now.. thats how they're gonna make money.

And, btw, are iPhones STILL BARBARICALLY carrier locked?

[bk7 @ Jun 9th 2008 6:30PM]

i said it in the RIP Iphone 1 post.. theyre goin for consecutive iphone posts now!

[Ayle @ Jun 9th 2008 8:38PM]

The 2.0 firmware has already been cracked so I wouldn't worry about unlocking unless they made so last-minute modifications...

[KarlW @ Jun 10th 2008 7:01AM]

Most of the apps they showed were free.

Also, if they only take a 30% cut of purchases, likely to be

[KarlW @ Jun 10th 2008 7:02AM]

My comment got cut for some reason. Here it is again (Engadget has so many issues, I copy each comment before I submit it):

Most of the apps they showed were free.

Also, if they only take a 30% cut of purchases, likely to be

[KarlW @ Jun 10th 2008 7:05AM]

Sorry about this, I was using an angle bracket, and the comment system burked the whole post thanks to it:

Most of the apps they showed were free.

Also, if they only take a 30% cut of purchases, likely to be less than $10, that's less than $3 per purchase. That's not a lot of money, especially when you consider the infrastructure costs (hosting, credit-card processing...etc). And then you've got to consider that free applications have no charges at all, so Apple has to foot the hosting and maintenance bill.

I doubt Apple is making very much profit (if any) on the App Store.

[Doc @ Jun 9th 2008 6:31PM]

Yo,

The keynote stream is up!
http://events.apple.com.edgesuite.net/0806wdt546x/event/index.html


[jaxim @ Jun 9th 2008 6:32PM]

I found it odd that they didn’t announce a 32GB iPod. Especially since they announced that 1)the iPhone would be priced at $199-$399, and 2) the 8GB = $199 and the 16GB = $299. What version is priced at $399? hmmmm.

[willyu34 @ Jun 9th 2008 6:45PM]

forget the 32gb model. Lets go straight for the 64gb!

I was hoping that would happen then i'll jump on the train right away...

Since it didn't, I'll be holding on to my ipod touch and sony ericsson a bit longer...

[TRAFFICBLOWS @ Jun 9th 2008 6:48PM]

Wait a few months! They'll prob offer the 32GB carrot when sales slow into the fall/winter.

[Jaxim @ Jun 9th 2008 6:52PM]

yeah. I'm definitely waiting for the 32GB version. Maybe we'll have a "One more thing" moment in the coming weeks.

[Mark Anderson @ Jun 9th 2008 6:37PM]

The carriers basically told Apple to shove the revenue sharing agreement up their arse. Apple did the sensible thing and agreed.

No news here.

[rafa @ Jun 9th 2008 7:37PM]

Doesn't that mean that Apple should be selling unlocked iPhones, much like every other company sells unlocked phones? It would only make sense from Apple's perspective, especially since now they don't see any action from the contracts.

[NoelSM @ Jun 10th 2008 5:06AM]

Well they will sell unlocked iPhones as soon has their 2yr contract ends with AT&T/Cingular.

[MTM @ Jun 9th 2008 6:38PM]

So, the main question for me is: Are they still using the online contract signing or will you have to do that in-store when you buy it now like with other phones? I think most of the new carriers won't let people sign the contract online at home.

[Ryan @ Jun 9th 2008 6:44PM]

You must sign the contract in store to take the phone home, major bummer and will stop me from getting one... glad i have my old 1.0 after all now!

http://techblog.dallasnews.com/archives/2008/06/att-announces-voice-and-data-p.html

[Mike Cerm @ Jun 9th 2008 6:39PM]

So, does this mean that they're going to change their activation method, meaning no more activation through iTunes? That was the key that allowed so many unlocked iPhones onto the market. I'm sure that AT&T is looking for any way to keep iPhones locked to their network, so will you now have to sign a contract before receiving a phone?

[orky @ Jun 9th 2008 6:40PM]

Apple likes to make money off the service rather than the actual hardware. Apple makes tons off iTunes from it's iPod sales. Apple is following a similar model now for making money of it's App Store rather than just from iPhones. Apple knows they can only sell each individual 1 phone but that individual may purchase multiple applications. With Apple keeping 30% of all fee-based iPhone apps, I'm sure they will recover more revenue from apps than from customer's contracts.

It will take a long while for people to be just as impulsive buying apps as they are when buying music. Apple said apps can be downloaded OTA on cell networks if the app is less than 10mb so maybe apps will begin being sold pretty fast.

[PatD. @ Jun 9th 2008 6:45PM]

Actually, you've got that backwards. Apple makes relatively very little from iTunes, the store just acts as to drive iPod, appletv and iPhone slaes.

[orky @ Jun 9th 2008 7:06PM]

I guess if nothing else, with this huge volume of iPhones it will be ridiculously cheap for Apple to produce them and margins will sky rocket.

[Carl Vitullo @ Jun 10th 2008 1:46AM]

If 10% is only a little, then i guess you're right.

but when you have millions of people who have probably bought an average of a few hundred songs each, that adds up.

souce:http://www.appleinsider.com/articles/07/04/23/itunes_store_a_greater_cash_crop_than_apple_implies.html

[Ed @ Jun 9th 2008 6:41PM]

So, um, does anyone know if we still need to use iTunes to activate a new 3G iPhone? Is it still only functional with a blessed SIM card? Or can we finally have SIM freedom and a normal (as in like every other phone) activation process?

[Jeremy K. @ Jun 9th 2008 6:44PM]

Nothing's changed in this department.

[Peter N @ Jun 9th 2008 6:47PM]

You still need to use iTunes. You cannot swap out the SIM like for a Nokia. Apple will make sure you pay the extra.
Happy days.

[Jeremy K. @ Jun 9th 2008 6:52PM]

zomg: http://techblog.dallasnews.com/archives/2008/06/att-announces-voice-and-data-p.html

We're really screwed.