AT&T Offering "Loans" not "Subsidies"?

iphone_3g_s_att_subsidies_vader

Interesting take from the Macalope this week with regards to the ongoing confusion and resentment surrounding current iPhone 3G owners and the price they'll likely have to pay when upgrading to the iPhone 3G S on AT&T. See, the Macalope believes both sides of the debate have it wrong:

[AT&T fronting part of the hardware costs to Apple] isn’t a “subsidy” by the traditional definition. It’s a loan. AT&T is loaning you the money to buy an iPhone and you’re signing a contract to pay it off over the next 18 months. If you decide you want out of your loan, you have to pay a buyout. [...] See, AT&T gets its money one way or the other. Nobody’s “subsidizing” anything.

Even if it is more of a "loan" than a "subsidy", though, does that make understanding the pricing model easier?

Also worth reading, In typical fashion, the Macalope thoroughly gores PCMag over their WWDC take-away -- using ponies, and their reaction to today's Safari 4 download numbers.

Rene Ritchie

Editor-in-Chief of iMore, co-host of Iterate, Debug, Review, Vector, and MacBreak Weekly podcasts. Cook, grappler, photon wrangler. Follow him on Twitter and Google+.

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AT&T Offering "Loans" not "Subsidies"?

32 Comments

How to fall in a Trap.
Look at dark bottomless hole. Look at bait over dark bottomless hole. Walk to bait. Fall in dark bottomless hole.

You know, it would make things much, much easier if they simply would call it a loan. Imagine if they did this and actually spelled out, in your bill, the specific amount that was dedicated to re-paying the loan/subsidy. Seems to me that it should be $11.11 per month ($200 difference between subsidized versus 'early upgrader' divided by 18, which is how many months it takes before you are eligible for the subsidized price again).
The problem? AT&T is banking on customers not wanting to upgrade exactly every 18 months. Therefore, using the above numbers, AT&T increases their bottom line by continuing to collect the $11.11 per month, even after you have fulfilled your contractual obligation.
Seems to me that it would be much fairer to the customer for AT&T to call it a loan. If they did, AT&T would be saying we will sell you a $500 phone for $300 and you will pay the other $200 back over the next 18 months. If you chose to upgrade to something else after 12 months, then you owe us $66 (which is $200 minus 12 payments of $11.11 which was paid for the 1st year.
However, this won't happen. Why? Because the cell providers don't want to apportion the bill to specify how much of it goes towards re-paying the subsidy. If they did that, then they would have to stop collecting that amount (in my example, $11.11) once the subsidy if fully re-paid. They would rather collect the 'subsidy-repayment' even after the subsidy has been re-paid. They do this if you keep your former phone longer than 18 months.

Is Macalope now the new authority on cell phone pricing? In any case, it is completely irrelevant whether you call it a subsidy or a loan. Once you enter into a contract with AT&T, you are bound to such contract. What is unclear about that, Macalope? If you ever wanted to turn in your financed car, have you ever heard of the financing company giving up what is contractually due to them, Macalope?

Call it what you want, I'm just glad I can have such a great phone for $300 or $500 instead of $700. If you want to hate at&t pick one of the other 100 valid reasons to due so, the price of the iPhone is not one of them!

This is not a loan they are offering, I don't think it fits that model at all. Here's my situation: I bought the 1st iphone and the 3g soon after their releases. If I want the 3GS, it will cost me $700, but on 12/24/09, I'll be eligible for the "full subsidy", according to AT&T. That means my loan is paid of on 12/24. What if I were to buy the 3GS for $700 next week, then next summer decide to forgo the 2010 model and wait to 2011 for my next iphone purchase? Does my monthly rate go down once the loan is paid off? Nope. I continue to make the loan payments for another 2 years, till the summer of 2011. If this is a loan, then it's a loan where the terms are that you continue to make loan payments after the principle and interest are paid off, until you take out a new loan- or alternatively, you could say that there's potentially infinite interest owed after the loan is paid, until a new loan is secured or the service that is bundled with the interest payment is dropped.

Well no matter what we say or how upset we are about the pricing they will not change. If you hate ATT because of this reason you are out of luck all of the other carier's are doing the same thing! Also $199 and $299 is apple's pricing not ATT.

Im so glad i didnt upgrade to the 3G last summer like most did. My first gen 8gb has worked just fine for me, yes its slow 2g internet but simply has worked for me the last 16 months. Now since I didnt upgrade to 3G like most did Im now eligible for the $199/$299 prices come next Friday and will be picking up a 32gb 3GS happily for $299. Will be like a whole new phone yet knowing how to use it right away. People that just come in here and say AT&T sucks are just haters and losers. Im sure all networks suck one way or another. They are trying to make Iphone killers but havent come close yet. The pre is all bad reviews and is half hearted from what Ive read. Im so looking forward to the 19th at 7am :)

every carrier does this... why are you people whining? Either do like the Europeans and buy a phone full price or do a 2 year....

@Lollipopjones
You're exactly right. I don't know why people are so upset about this. You buy an expensive piece of hardware, and to keep you under contract, the carrier agrees to pay for the bulk of the up-front cost. When has this NOT been the case? Actually, my understanding is that you can indeed upgrade to the new phone when it comes out even if you aren't due for an upgrade. You just have to pay the full price. (something like $500 dollars or so?)
Why are people up in arms? Shouldn't we have assumed this would be the case?

Barry L, but as a compromise you have had to spend the last 12 months having the annoying inconvenience of an EDGE data network. Kind of defeats the purpose of the phone altogther in my eyes.
My view is if you want/need 3G, get it now and forget about all these incremental upgrades. No point waiting till 2011 for a 3G phone if you want 3G now!

@Jason
Not everyone in disagreement here is upset or complaining necessarily. I and some others dispute the contention that the subsidy is a loan- that is the topic of this thread as well as the title of the article. I've already plunked down my $700 with no complaints. (I like my toys and I'm willing to pay, what can I say).

How about, phones shouldn't cost over X amount of dollars with or without contracts?
I think $199 is a fair price for a phone, with a contract.
Actually, there shouldn't be any friggin contracts, and phones should still cost at most $199.

The early termination fee is $175, prorated $5 a month. That means that you can get an iPhone, pay for the handset, pay the connection fee, and 1 month tariff. Ssince you pay the 1 month tariff in advance, I'll count it as profit for AT&T). Let's see, that's $199 + $36 + $69.95 + $175 - $5, or $450.95. And... once you terminate the contract, paid in full, you can request your unlock key to move it to any GSM carrier. Probably close to the wholesale price, you think? If we get technical about it and count just the $199 + $175, that amount is dangerously close to a subsidy - but I bet AT&T accounting are still squeaking by.

@Truth
Material of most electronics these days including manufacturing is EXTREMELY cheap.
If you actually look up the process and price for all the little things on an iPhone, I believe it comes out to be around 30 dollars. That includes shipping as well.

My mistake on price on that, it says 250 to make, that doesn't seem right though, I remember seeing it arond 30, 27 dollar and some cents to be exact.

OK, so what if you have an iPhone for 3 months with at&t and cancel, sell your phone on EBAY for $500? Is at&t really getting its money back? If the are subsidizing the iphone $400 off the actual cost, how is it that at&t is making the killing within the first year? How many people that you know have sold an iPhone (I know more than a few)? I think you're flawed, otherwise at&t would have had much more profit than 12-13 billion last year. What are Apple's number in comparison? Why is Verizon better if a blackberry with 450 minutes, unlimited text and unlimited data is $10 more than an iPhone with the same stuff?
Blogs are beginning to suck...MM

not a loan. there is no interest being charged. no finance contracts. only a contract to retain the carrier as your provider. it is just a guarantee that you wont jump ship once AT&T offers you a discounted phone. discounting the phone eats into profits but if you stay with them a certain amount of time then it's worth it.
the fact that there even has to be an article about whether or not this is a loan is evidence enough that people are up in arms and complaining. This simply should not be. it is a non issue. if one is not happy with the terms then find a carrier with terms that you are happy with and do not sign a contract that you are later going to try and complain your way out of. no one is forcing anyone into anything. they are enticing you with groovy, neat phones but if your a person of character you'll be able to say NO THANK YOU, if you feel it's unfair.

I think part of the confusion is that the Apple and AT&T sites are telling people who are not eligible to upgrade their phones that their only option is to pay $700. I wrote to AT&T CS about how the pricing worked, and one of the things I was told is that by signing a new 2-year contract I could get the phone for $499, which is not mentioned anywhere when you fill in the form that tells you what your eligibility is.

Calling it a "loan" would subject them to credit regulations and possibly make AT&T a non-bank bank.
While I appreciate Apple's efforts to enhance the product, the i-phone's main deficiency is the poor quality of AT&T network. The primary purpose of any cellular phone is to connect two callers - something that continues to challenge AT&T.

@dmys
You could not be more wrong.
The cost of the iPhone 3G components was $174.33, according to iSupply in a study they did last summer (http://bit.ly/133BQc). They also claim that Apple pays $50 IP royalties for each unit, so the cost of just the unit is $224.33. If Apple did try to sell it at $199 without subsidy, they would lose a LOT of money because that price is only for the assembly. As Gizmodo points out, "This figure does not include additional costs like software development, shipping and distribution, packaging and miscellaneous accessories included with each phone." It also does not account for the people who work for Apple, the costs of the retail locations, and other expenses associated with running a company. If you take all of that into consideration, I think $699 for a device like the iPhone is a pretty good deal. And unless you're ready to pay that price, you need the carrier subsidies.

I think people are getting too stuck on the word "loan" as it's defined by banks (interest, regulation, etc.). I think the point of the article identifies it as a loan in the dictionary-definition sense. They give you money (in this case towards the cost of the phone), and you are expected to repay that over a period of time. That's a loan, no matter how you slice it. Of course, you're right that they can't call it that for legal reasons (and probably PR reasons as well), but in the truest sense of the word, it's a loan and not a subsidy.

ATT is full of crap, they know Apple is going to be putting new iphones out each year, why don't they come out w new phones every 2 years when our contracts are up!!! i bet the sale of the 3gs(ucks) is going to be way down, i was going to pay the $299, but now i think i will just jailbreak my phone, only reason i wanted to buy the new phone anyway was bcuz of the video camera!!! ATT U R SLIPPING!!!!

Not a loan, that's just silly. The monthly fees don't change whether you have asubsidized phone or not. If it was a loan, the fees would drop or those without subsidies wouldn't pay as much.
It's so simple, I still can't fathom why there's been any debate (other than the passions ignited by those who simply can't stand the idea of waiting for the latest thing)
ATT charges a monthly fee for it's services. You may buy a full priced phone (or use one you already own) and cancel your service with them at any time.
However, you may want a different, more expensive phone but not have or want to pay the full price. In that case, ATT will take a loss on the sale of the phone in return for your agreement to stay with them at the same monthly rates as everyone else for two years AND forego upgrades during that time.
That's not a loan, it's marketing strategy. You get an expensive phone for less. They get your monthly dollars for two years. WIN-WIN.
And for g-d sakes stop whining if you have to wait - you got your subsidy, saved several hundred bucks and now you just have to wait until 18 months passes since you bought the last phone. Or pay full price, whatever you want to do. No one if forcing anyone to pay anything or do anything.

@Greg
Just pretend that they are only putting them out every two years. Ignore the 3Gs and when next years phone comes out, get it then. You're no worse off than if they were only coming out with new models every two years