When's An iPhone Worth $425? When You're AT&T

Many people have been wondering why the new 3G iPhone is much cheaper than expected. It turns out wireless carrier AT&T is paying Apple a hefty subsidy for each handset sold.

The phone's retail price is $199 for the 8GB (gigabyte) version and $299 for the 16GB version. According to one analyst, AT&T is not only paying that sum to Apple, but is handing over an extra $325 each time they sell a handset. They are also paying an extra $100 each time an Apple store customer subscribes to AT&T for the first time. The combined $425 subsidy is more than double the usual $200 or so which carriers pay for smartphones. (Source: cnet.com)

Of course, this subsidy is part of a deal by which the device only works as a phone on AT&T's network in the US. Apple has signed several similar deals around the world, though in Italy they experimented with making it available on all networks. There's also been widespread 'unlocking' of the phone by importers in China where the phone isn't licensed for sale – despite being produced there.

If the reported details for AT&T are correct, it's a big change from Apple's originally planned business model for the iPhone; they wanted consumers to pay a high price and for wireless carriers to hand over part of the monthly fees they then took from monthly service charges (as happened in a previous Apple-AT&T deal). Neither of those is now happening. (Source: theiphoneblog.com)

The new deal may seem odd on the surface, but both sides should benefit. AT&T will be able to attract new customers now the phone is more affordable, and they are taking advantage of their hold on the iPhone service market by raising monthly fees from $20 to $30. That means they are paying a lot more cash up front, but should make more over the long run.

Meanwhile Apple is losing out on long-term income, but should make up the difference because sales will likely be considerably higher. Even if they only wind up making the same amount of cash, it works out better because they'll have a wider customer base to pitch future products to.