by · June 10, 2009

Current iPhone 3G users are up in arms about not getting the same discounted iPhone 3G S price as new customers would. Their argument is that AT&T should be “rewarding them" for being loyal customers. Man, I sure wish the world worked that way. I’ve been a “loyal customer" of Time Warner High-Speed Internet for over 6 years and my monthly plan keeps going up, not down, even as infrastructure upgrade costs fall. I’ve been a loyal customer of Apple for years too, and don’t get any special discount on my next MacBook Pro simply because I’ve bought one before. And phones don’t work that way either.

I wonder if the current spate of anger relates to two things: 1) a conflation of the general hatred being levied towards AT&T right now over their completely craptastic reception and service, and 2) a new market of iPhone 3G owners who have never previously purchased a smartphone, and thus don’t have much direct experience with how cell phone subsidies work in the U.S. and on carriers around the world. The actual cost of a smartphone device as sophisicated as an iPhone or G1 or Nokia N97 et al is many hundreds of dollars — I tend to think of it like “car trouble" price: whenever something goes wrong, I steel myself to be out $500-600 no matter what the heck it is. Some phones climb as high as a cool $1k for an unlocked GSM handset. The only reason smartphones can be had cheaper is because the carrier subsidizes them: you agree to be locked in to this 2-year contract and the carrier is guaranteed to extract $XXXX from you over that period, in exchange for which they discount the price of your phone because they’re guaranteed to make that money back from you (unless you cancel early, which people seem loathe to do even though a $150 early termination fee (or less, depending on how much of the contract has elapsed) is far less than you’d pay to stay stuck in the contract… maybe it’s the principle of the thing).

Thus, if you want to pick up a new phone before you’ve completed that 2-year contract you signed, you’re just plain SOL. There is no special deal for you, and if there were the whole phone subsidy house of cards would fall apart. What would stop me from popping in every month to pick up the latest hot smartphone on deep discount, and what incentive would carriers have to support that?

What these folks are really angry about is the underlying racket of the phone subsidy. It’s spurious to blame Apple or AT&T for “allowing" this pricing scheme — this pricing scheme is typical for the mobile market. Still, neither Apple nor AT&T have done much in the way of educating a First Time Smartphone Buyer market about how this works, and they could have softened some of the blow if they had. Nevertheless, it’s a rude but entirely fair wakeup call to phone buyers about how the subsidy system works.