AT&T Shows Off Greed and Stupidity in Pricing for iPhone 3GS for Current Customers

Posted by | 06/08/2009 | 27 Comments

iphone3gs I’m not sure why anyone should be surprised by this. I’m angry about it, but my anger comes from knowing that AT&T would continue to defy any rational thought of building customer loyalty when it comes to pricing the new iPhone 3GS for customers who already have the iPhone 3G and wish to upgrade.

The big pricing for the new iPhone was met with cheers at the WWDC keynote and deservedly so. A new customer can purchase a 16GB 3Gs for $199 and a 32GB model for $299. All seemed well, unless you’ve been following AT&T’s bean counters and their history. Word quickly got out thought that those have a current 3G model and wish to upgrade (remember those contracts started last summer) will be able to early upgrade for $399 for the 16GB model and $499 for the 32GB model. (Note that isn’t mentioned in the AT&T press release in the earlier link.)

Yeah, yeah, yeah, I know some will say but you have a contract for two years. Horse hockey. AT&T is playing a game with diminishing returns (other carriers do this too) by forsaking any semblance of building customer loyalty. Any business or business person worth his/her salt knows that once you hook a customer, you do whatever you can to hang on to them. I haven’t done the math yet, but I’m guessing this is short term gain on a spreadsheet that won’t work out in the long run. But then that’s not the history of the cell phone biz. That’s why they have to spend all that money on Customer Retention Specialists. And of course we know how that game works. Hook ‘em, tick ‘em off, lose ‘em, and then try to hook ‘em again. Someone at AT&T got really lucky when Apple agreed to that 5 year exclusive on the iPhone. I bet they’ll retire before it is up next year and Verizon (and possibly other carriers) jump into the game.

But this is not new behavior. I wonder what it is like to work for the PR firm(s) that handle this account for AT&T. From a PR and customer loyalty standpoint AT&T came out a huge loser with Apple’s announcement today. US customers got left out in the cold and basically labeled as second class mobile citizens, while Apple slyly mentioned that their US exclusive carrier would not be able to handle the traffic. To my eye and ear it was an obvious slap from Apple at AT&T on the way features like MMS and tethering were rolled out, listing carriers worldwide that would support the new features at launch. No one had to say AT&T, the graphics told the story. Wouldn’t you think AT&T would have had some sort of announcement parallel with today about the supposed hurried pace they are working on to upgrade their dismal network performance? Wouldn’t you think that they wanted to help their own case for the future? Apparently not.

AT&T’s rep has become such an old joke that no one laughs anymore. I think lots of folks are just going to bide their time until they can walk away from the shoddy treatment. From a business standpoint this ranks with as a very interesting model that will deserve all sorts of study down the road when this is all behind us. How could a company with terrific brand recognition succeed as much as AT&T has while becoming the butt of so much derision?   Again, to be fair, the cell phone game has been played by this for a long time by other carriers as well, but something tells me the iPhone spotlight has shown this off in a light that will probably lead to customers paying closer attention in the future. But then on the other hand the iPhone is such an unparalleled device (at the moment) that most will probably just play along and continue to enable AT&T and the other carriers.

I find it fascinating. I’m sure Google, Sprint, Palm, Verizon, T-Mobile, HTC and Nokia do as well.

UPDATE: Some info from Boy Genius Report on AT&T’s problems activating MMS and delaying tethering.

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Category: Editorials, Hardware, InkShows, Mobile

About the Author (Author Profile)

Warner Crocker is a professional theatre director, producer and playwright and also a Tablet PC enthusiast. He is also a Microsoft MVP for Tablet PCs. Send email to Warner.
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  • http://www.amax.co.za Harry de Vries

    You lucky bastards!! Arguing about the little things… Some of us in other less civilized parts of the world – read: Vodaphone – DON’T have the option of upgrading early without paying the FULL unlocked price for the new 3GS and then only in another 2 to 4 months when it launches here!!!

    I agree with “Seriously” on his analogy of the Merc. Maybe Apple should offer an upgrade on the condition that you trade in your old iphone. That way new customers don’t feel cheated having to pay the same as someone who essentially gets a used iphone 3G free on the same deal as them…

    I’ll go back to feeling very sorry for myself and filling in some more of those green card lottery tickets now…

  • John Gibson

    It sucks but it’s not like there is no remuneration for entering into the two year deal. Would it really be better for consumers if contracts and subsidies went away? There is some benefit for consumers having iPhones available for $199 and $299 respectively. When the 3G was released it was estimated that Apple receives on average (higher for 16 GB, lower for 8 GB) $466 for each iPhone sold. Wanting contracts to go away (which of course would include subsidies going away) would equate to $500+ iPhones.

    Isn’t it a lot to ask of AT&T (avg of $466 on 3g, unknown on 3gs) to take that hit alone on a yearly basis for users who want to upgrade on a yearly basis? If any company deserves to be criticized for not offering it’s loyal customers a break it is Apple who not only gets that sizable up front payout for each iPhone but also gets a staggering $18 (est) a month out of each users monthly bill. It amazes me how AT&T gets portrayed as greedy while generally Apple gets a free ride.

  • Brandon

    I don’t understand what the problem is. You got a subsidized iPhone 3G a year ago, and are now trying to get ANOTHER subsidy on top of your unfinished subsidy. Talk about trying to double dip.

    Just because you want to have the latest and greatest doesn’t mean that you can skirt the rules. This is the same with any other carrier be it Alltel, Verizon, AT&T, or Sprint. Just because you have an iPhone doesn’t make you special.

    First gen iPhone owners bought the phone unsubsidized, so they were able to get the iPhone 3G for the lower price right away. Since just about everyone buying an iPhone 3G got the subsidized price, you’re going to have to pay to play if you want to BREAK YOUR CONTRACT and get the latest and greatest.

    Bottom line, you knew what you were getting into, so what’s the big deal? That being said, Gizmodo tackles these whiners better than I could have ever done:

    http://i.gizmodo.com/5284318/whiners-of-the-world-shut-up-about-the-iphone-3gs-upgrade-price

    P.S. I love the comment about AT&T not keeping up their end of the bargain on the network quality, yet you want to get another phone using that same network… PRICELESS :)

  • http://sumocat.blogspot.com Sumocat

    Why the Mercedes argument fails: lease vs. own. If you leased a phone, then certainly you should get the same deals as if you lease an automobile. But phones aren’t leased. I think leasing would be a good option, but that’s not how it’s done now so the comparison is invalid. It should be more properly compared to the experience of buying an automobile, and you know how awesome an experience that is.

    • http://www.notebooks.com Xavier Lanier

      Actually Sumocat, they had similar offers if I wanted to buy. i.e. heavily subsidized financing options, discounts and extras not offered to new customers. Buying/leasing a car is virtually the same experience in terms of negotiating a price, negotiating terms, etc. The point is, the company puts a higher premium on existing customers and offers them better deals than potential customers.
      I think Apple/AT&T would really benefit if they offered something extra to loyal customers, especially those who upgrade every year.
      iPhones have a pretty short lifespan and their batteries can be significantly degraded long before the 2-year contract is up. Techcrunch ran an article recently about this issue that’s worth a read.

  • Warner Crocker

    With my loyal customer base at Wayside Theatre we do the following. (I know this may be slightly an apple and orange comparison.) If you are a subscriber (the loyal base) when we raise ticket prices you get to purchase your next year’s subscription at the older price, not the new price. Only new customers have to pay the new price. The base is given a deadline to exercise the lower price option and then the price goes up to the new price point. This results in about a 78% return rate for loyal customers annually and keeps them on our side. It doesn’t hurt us in gaining new customers, and in fact, it actually helps us gain them, as they see they save more in the long run.

    Now the business model builds these savings in to our revenue structure (much as I suspect the car model does as well), so nothing is being lost here on our end.

    Part of AT&T’s problem is the ridiculous language they use as well. If I told my base, “Because you are a ‘valued customer’ I’m going to charge you more for the privilege to upgrade your subscription, but the guy who just bought a plan doesn’t have to pay the same freight” (Yes, we do offer upgrades and yes, again some apples and oranges here) they’d laugh me out of a job.

    The cost to capture a new customer is always expensive. The cost to re-capture a lost customer is far, far, far away more expensive. Always has been, always will be, regardless of the business.

  • http://sumocat.blogspot.com Sumocat

    Xavier: Benefit? They’d lose $400 a year if they offered a full subsidy to people who upgrade every year. That’s just under half my phone service fee, not counting taxes. How would they stay in business giving 45% rebates up front to low-end customers? Nobody can do that.

    Besides which, you got a deal on your Mercedes six months before your four-year contract expired. AT&T allows customers to get the full subsidy six months before their two-year contracts expire. Doesn’t seem like a huge difference to me.

  • http://sumocat.blogspot.com Sumocat

    Warner: “Now the business model builds these savings in to our revenue structure (much as I suspect the car model does as well), so nothing is being lost here on our end.” — Exactly. What you’re asking is that AT&T and other carriers lose money by offering a $400 subsidy every year instead of every other year (or every 18 months). It can’t happen. The only absolutely fair system is to not subsidize and offer lower monthly rates, but as has been argued by Xavier, lower up-front pricing is far more attractive to customers, even if the monthly rate is high. Dropping the subsidy means fewer customers. Increasing the subsidy means losing money. Carriers lose by going to either extreme, so they operate in this middle ground.

  • http://www.notebooks.com Xavier Lanier

    @Sumocat. So my old car was a 27-month lease, which means they were eating about 20%, other incentives made it closer to 30%.
    The up-front cost of an iPhone is nothing compared to the total cost of ownership for an iPhone. Over two-years users will spend $2,100 to $4000+.

    One thing that really bugs me about 2-year contracts is that phones don’t even come with 2-year warranties. The iPhone’s battery doesn’t perform very well after several months of use. I wish AT&T would offer damage protection like it does on the rest of its phone lineup.

    At least with cars you know that they’ll work over the life of their lease/payments.

  • Warner Crocker

    Sumocat, It isn’t a loss. Here, we don’t count it as a loss because we know (and countless other business models prove this as well)that we would stand to lose more if we did it any other way and have to spend more to recapture old customers. The equation I assume (bad on me if I’m wrong there) you are using is similar to the pirate equation when it comes to pirates stealing films/music, etc… All of those billions that are lost. Just because a potential outcome may exist does not make it a hard value that can be claimed as a loss in all circumstances. That gets into accounting mind games that I spend far too much time trying to make real world here at my job.

    All of that said, I agree that we’d be better off to do away with subsidization period. I think you’d see the costs of the devices come way down as all subsidization allows is for them to inflate the price in the first place.

    As to the middle ground, there is no such place. Carriers are playing a zero sum game in the long term that depends on new hardware to drive the market. The service and services they offer would not be attractive if customers could buy phones and devices that worked on any network. Wait until Verizon gets its iPhone. AT&T is going to lose more than face then. You’re talking real dollar losses at that point.

  • http://tech.bigbeaks.com JeffGr

    I think the big unanswered question is whether these subsidies are really covering the actual cost of the phone or if the prices are inflated in order to accommodate the subsidy. Obviously, the cellular carriers really want phones to have generally prohibitive non-subsidized prices in order to maintain the contract system. If customers could buy unsubsidized phones at reasonable prices, it is a safe bet that most would forgo the contract and, thus, feel free to switch carriers at will.

    Let’s take a look at the 16GB iPhone 3GS prices. The fully-subsidized price is $199 while the partially-subsidized (after 1 year) price is $399. Reportedly, the full price without any subsidy (purchased without a contract or less than a year into curent contract) is $599. By comparison, the 16GB iPod Touch retails for $299. Is it really believable that the addition of the cellular radio (plus the few hardware upgrades between last year and this year’s models) really justify double the price? I suspect there is a lot of pure profit contained in there.

    Now that smartphones are becoming more mainstream while their feature set advancement is moving pretty rapidly, I do think the carriers are going to have to start re-thinking the way they run this. There are going to be a lot of people that are going to want to do annual upgrades and I think it is a safe bet that there will be some who want to upgrade even more frequently when they end up unhappy with the phone that they purchased.

    If I am correct with my guess that there is a lot of pure profit in the subsidies, I could see where it might worth it to invest some of that in loyalty and retention. Sprint’s Premier program, which basically offers full subsidies after just 1 year, could easily be the first sign of this. Sprint obviously has much more of a need to work for retention now, but I could easily see the other carriers following suit as the market dictates.

  • Kupe

    I wish the phone companies would treat this subsidy appropriately and call it what it is: A loan.

    It is essentially a revolving credit plan that you pay on monthly (as a part of your service fee) for the privilege of a smaller up-front investment in your phone. At the end of your contract period, you have fully paid off your loan and now own your (not necessarily useful on any other network) phone. If you terminate your contract early (i.e. decide you want to suddenly close your credit account) you have to pay off your remaining loan balance (ETF).

    Unfortunately, the way the way the system works now is everything is in favor of the phone company: ETFs are too high (even the declining ones), monthly payment size on the “loan” is unknown (hidden from the customer), end of contract “discounts” for new phones are likely just a return on your overpayment during the life of the contract. If the wireless providers were required to truly disclose their costs by falling under fair lending practices, a lot of the current mistrust and secrecy (and likely over-profits) would be reduced.

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