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

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.

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

Comments

  1. Xavier Lanier says

    I don’t like these kinds of games either. My wife and I were just discussing the best way to buy the new iPhone 3Gs and I don’t think we should have to be crafty.

    I know it’s a pain, but I bet you could sell your iPhone 3G for $200+ on ebay or craigslist to make up for the price difference…

  2. John Gibson says

    I understand the frustration but I also understand AT&T’s rationale. I’m sure Apple is not willing to take a smaller cut for each unit sold to an existing 3g customer. Couldn’t it also be said about Apple that it defies any rational thought of building customer loyalty when it comes to requiring the same cut for new iPhone 3GS for customers who already have the iPhone 3G and wish to upgrade?

  3. Warner Crocker says

    John,

    I’m guessing Apple gets the same cut regardless. Unless I am vastly mistaken this is AT&T’s move alone. But I agree, I understand AT&T’s rationale. Screw customer loyalty. Grab their bucks while we can before the exclusivity deal runs out.

  4. Warner Crocker says

    I would agree, Xavier. You probably could sell the older model to make up the difference, but it will be more difficult with the 3G still being for sale at $99.

  5. John Gibson says

    I definately understand the frustration as a 3g customer myself but I don’t feel the anger should be isolated to AT&T. If I go to the Apple store to buy a 3Gs they aren’t going to cut me a break on the price by taking a smaller cut as a reward for customer loyalty. They are going to grab their bucks – their same high margin while they still have a captive market.

  6. Sierra Modro says

    Given that the $99 iPhone 3G will also require a 2 year contract, I think Craiglist / eBay pricing for the iPhone will remain above the $99 price point. If you buy one from Craigslist you can unlock it and use it as you want, without having to worry about AT$T and their gouging plan$.

  7. Sumocat says

    Warner, I honestly don’t see the problem with getting half the subsidy for completing half the contract. If you look at the subsidy, the math breaks even.

    The iPhone subsidy is $400. Get a phone now, you get the $400 subsidy. Wait two years, you get another $400 subsidy. Wait one year, you only get half the subsidy, $200, but if you upgrade again the following year, you get another half subsidy, $200. Either way, you get the total $800 subsidy. Yes, you do pay a lot more and only get one more phone out of it, but the subsidy amount is the same as for someone who fulfills their contract.

    Basically, everyone who upgrades annually or semi-annually gets a $200 subsidy every year. Why should customers who upgrade annually get a bigger total subsidy than folks who upgrade semi-annually?

  8. GoodThings2Life says

    What’s to be surprised about? It’s AT&T and it’s Apple. Cost effectiveness never enters into the minds on either side…

  9. JeffGr says

    The real complaint here is less about AT&T and Apple specifically than it is about the current business model used by the cellular industry as a whole, at least in the US market. I would have loved to have purchased a Palm Pre this weekend, but I am already a Sprint customer who last upgraded my phone (unfortunately to one I don’t like very much) last October. That means that I would have been faced with pricing on the Pre very similar to what most current iPhone 3G customers would pay to upgrade to the new 3GS.

    I think it is a pretty lame business model for exactly the reasons stated, but none of the companies seem overly anxious to break with it. Thanks to the “Sprint Premier” program, I anticipate that I’ll be eligible for the new customer pricing on a Pre in October (assuming I still want one then), but I suspect AT&T doesn’t feel as much of a need to offer that kind of loyalty incentive since they don’t share Sprint’s financial troubles.

  10. Scott says

    I’m truly disappointed in Apple/ATT’s decision to not allow existing 3G users to upgrade to the new 3GS phone for the same price as new users.

    Apple/ATT established the precedent for discounted upgrades for existing users when the 3G came out. They should continue in this tradition and reward loyal customers who want to purchase the phone as it upgrades year after year. Forget the technicalities of the fine print in the contract, just go with your gut on this Apple – it makes sense to reward loyal customers who want to pay you money to get the latest phone model each year when it comes out.

    The bottom line is that this is going to anger a lot of people who will feel, like me, that they are being punished for purchasing the 3G last year. After waiting for months for news of the release of the new phone with excited eagerness, I’m left feeling like a second-rate customer who will consider another smart phone option when my contract expires. So much for the loyalty to existing customers that Apple has normally shown. They’ve turned a die-hard Apple enthusiast into a doubter in one day.

  11. AKO says

    To be honest, I can’t believe people are complaining about this. I mean no one else gets additional subsidies for renewing their contract early so why should iphone users. When my friend broke her phone 1 year in to her contract t-mobile gave her almost no discount even after she extended her contract for another year.

  12. Seriously? says

    You guys signed a TWO YEAR contract!

    If Apple comes out with a new iPhone model every year, you shouldn’t be whining about not being able to upgrade at the lower two-year contract price. It sounds like you are just trying to make up your own pricing just because you want the latest-and-greatest iPhone.

    And you want it for the two-year contract price even though you’ve only honored one year of your contract.

    So you are saying that Apple should lower the price of the iPhone G3 S to the ATT 2-year contract price without charging you extra because you really, really want the newest iphone and don’t want to pay more than 2-year contract buyers are paying for it?

    So what happens next year when Apple ships it’s next iPhone upgrade? Are you going to be whining again about ATT’s 2-yaer contracts again and how unfair they are to you?

    Apple giving you a free upgrade to th iPhone 3 OS which is a great upgrade for your current 3G. Please stop the whining.

  13. Warner Crocker says

    Like I said in the post, “Yeah, yeah, yeah, but some will say you have a two year contract. Horse Hockey.” The only thing keeping the contract enforceable is that folks go along with it willingly, myself included. The practice is just flat out wrong, by most counts, legally dubious, and that is why many, including myself like to point this out every chance we get. It’s not whining, Seriously. (I love anonymous posters.) It’s called trying to change things that in the long run aren’t good for consumers or anyone else except the shareholders.

    Oh, and by the way, I don’t think AT&T has honored their end of the bargain either given the shoddy shape their network is in. Contracts work both ways. Except when no one complains about the issues.

  14. Seriously? says

    Since Mac users love to compare their computers to Mercedes, so lets go on with this analogy…

    So you sign a four-year lease on a Mercedes model and then a year later, they release an all-new version of that model with 100 more horse-power and an all-new exterior and interior. You are saying that you should just be able to pull your older model into the showroom and they should exchange it for the newer model at limited or no-cost to you.

    …Or you will write about how bad their customer service is and how they are ripping the consumer off and you’re fighting for change.

    Your 3G still works. You have a new OS coming next week that’ll add more features & functionality to it. You don’t need a new iPhone G3s, you just want one and don’t want to have to pay extra for it. Wah!

  15. Xavier Lanier says

    @Seriously

    As a Mercedes owner I can attest that this is exactly what Mercedes does for customers. Last year, the company sent me a letter about 6 months before my lease was up offering to buy out the last 5 months of my lease and thanking me for being a loyal customer. The letter said I could get a newer, bigger, better, faster model in time for the holidays (and yes it had 75 more horsepower).

    I was in the midst of weighing different car brands and was actually leaning towards a competitor, but Mercedes was basically tearing up the original contract and paying for any damages, pending service, worn out tires and mileage.

    I didn’t have to ask ask for this deal, but I sure was glad to get it. It made my decision easier and I got a better deal than any new customer could.

    Now imagine if Apple/AT&T treated iPhone customers like Mercedes treated me? Do you think they’d pick up some loyalty points and keep some customers from switching to other carriers? Do you think some of us would forgive shoddy 3G reception, handicapping iPhone apps and lack of MMS/tethering support?

  16. Harry de Vries says

    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…

  17. John Gibson says

    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.

  18. Brandon says

    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 :)

  19. Sumocat says

    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.

    • Xavier Lanier says

      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.

  20. Warner Crocker says

    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.

  21. Sumocat says

    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.

  22. Sumocat says

    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.

  23. Xavier Lanier says

    @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.

  24. Warner Crocker says

    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.

  25. JeffGr says

    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.

  26. Kupe says

    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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