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

Chris Ziegler
06.09.08
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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.

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