AT&T Paying Apple $325 to $425 per iPhone 3G in Subsidies?

iPhone Dr. Evil

The original iPhone 8GB launched with a hefty $599 price tag, though it dropped to $399 a short time later. Though contract details were never disclosed, some pundits and analysts have estimated that AT&T paid Apple up to $15 per month, per customer, in revenue sharing. Over the life of a 24 month contract that would be an additional $360 for a grand total of $959 (later $759) per iPhone!

As both Casey and I have discussed before, the new iPhone 3G 8GB dropped at a super-reduced price of $199, and while again no contract details have been released, it's universally believed to be carrier subsidized up front.

So, rather than a little bit of money each month for 2 years, Apple is now getting a big chunk right away. How much? The estimates are starting to come in:

[Oppenheimer equity research analyst Yair] Reiner said he also believes that AT&T is paying Apple an extra $100 for each new subscriber to AT&T signed up through Apple's brick-and-mortar stores, for a total commission of $425. That data point alone suggests that the analyst believes AT&T is also paying Apple the $325 subsidy on phones Apple sells.

If accurate, the iPhone 3G would give Apple a total of $524 per unit if AT&T sells it, and $624 if Apple sells it themselves. Not as much as before, but since its all up front, and economies of scale means they might be producing them at a lower cost (in greater volumes), not to mention the HUGE upside of putting market share ahead of profit, it could still be worth far more to Apple than the previous deal.

Though not the business model some of us expected, it seems Apple is serious in gunning for those low sticker-shock sales.

It should be noted, however, that not everyone is jumping on the $325 number. Scott Bourne argues:

[T]he early termination fee for the iPhone is $175. If the subsidy were $325 - that would be the early termination fee.

Rene Ritchie

Editor-in-Chief of iMore, co-host of Iterate, Debug, ZEN and TECH, MacBreak Weekly. Cook, grappler, photon wrangler. Follow him on Twitter, App.net, Google+.

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There are 8 comments. Add yours.

Tom says:

I don't currently have the first iPhone, and I am about 18 months from being upgrade eligible. If these new subsidy rumors are true, I am screwed.
I want this thing, but there is no way I am paying $700 for it....

Dieter Bohn says:

"[T]he early termination fee for the iPhone is $175. If the subsidy were $325 - that would be the early termination fee."
That's just wrong. The ETF is standard across all AT&T phones. Do you really think AT&T pays the same subsidies to manufacturers across all phones, from the cheapest non-data-flip all the way up to their top of the line, likely to get them a bunch of data and sms cash, phones?

Rene Ritchie says:

It will be interesting to see if Apple breaks out iPhone unit earnings at the next CC, and we can work out what the average is they get per iPhone sold. More than $199, but how much more? (Obviously AT&T wouldn't pay what the iPhone unlocked would go for at retail, but I'm still guess it's a nice chunk of change). Enough to keep Apple's historic ~30% hardware margins? Or is Apple taking a cut to grow market share there as well?

Scott Bourne says:

Actually I also said that in an interview with an AT&T executive, I was given the distinct impression that the fee is much lower. That combined with an ETF of only $175 leads me to say bunk.

Jon says:

im waiting for them to say...okay we havent seen as many iphone sales as we had hoped...and just subsidize it already ATT. they already arent offering some of the new features like MMS or Tethering...ATT must be feeling the pain. also if this pricing keeps up, they wont enjoy the millions of new customers (wanting only the iphone, NOT their service). im sure they are in the same situations with all the other generic phones they sell, not making very much money off retailing a phone, but more making money on the actual service.
i got the iphone 3G and even though i got the lowest plan, i end up paying 90 dollars a month so i end up paying 2,160 for the contract over 2 years. im sure ATT TAKES A HEALTHY chunk of that. even if they had to pay to subsidize the phone.

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