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.