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AT&T to Cut iPhone Plan by $10?

The latest word on the street is that AT&T could cut the price for the data plan for 3G iPhones by $10/mo. Is this more psychological than anything else?

The rumor states that the price for the cheapest iPhone plan would go down $10/mo (from $69/mo to $59/mo), which means you would save $240 over the two year contract per iPhone. Given that AT&T isn’t just going to hand money back to the customer, they need to make that $240 over two years back.

It might seem like a large cut at first glance – $30/mo for iPhone data to $20/mo, and it will certainly attract customers who think $30/mo is just too much for mobile data but $20/mo is acceptable (the first iPhone resale market was built around that idea). However when you look at the total cost of ownership for an iPhone over 2 years, the initial up front cost of the $199 device and $69/mo minimum plan for 24 months, it comes to about $1880 for two years. Cutting $240 from that bill only reduces the total cost to $1640, a reduction of 13%, not the 33% people would quickly conclude (and AT&T and Apple’s PR would spin this as).

Also, we haven’t seen all the cards in AT&T’s hand at this point. They could reduce the subsidy they offer on the phone, and/or convinced Apple to lower device prices a little – Apple could be getting as much as $400 for a phone that costs about $180 to make (based on estimates from last summer, likely less now), a gross margin of 55%, much higher than Apple’s 30% target. If AT&T does both, they could sell a next generation 8GB iPhone for $199 and pay Apple $275 per phone, reducing the subsidy from around $200 to $75. Apple’s margins would likely be in the 40% range and AT&T will have reduced the subsidy by $125, about half of what they would “pay” by reducing the data plan price.

One other alternative would be to start segmenting data plan speeds. In the same way your local cable company offers a basic, standard and fast internet connection speeds, AT&T could offer basic (EDGE) service for $12.99/mo, standard 1.5Mb/s similar to the current 3.6Mb/s HSDPA network) for $19.99/mo, and fast 3.0Mb/s for $29.99/mo, fully utilizing the 7.2Mb/s HSDPA specification. The EDGE plan would be suitable for email and basic web, the middle tier would offer a good browsing experience and streaming audio over the web (like MLB’s At Bat gamecasts) and the fast plan is sufficient for streaming video if AT&T decides to allow it.

Or, as I suspect deep down because I distruct telecos, AT&T is really just reshuffling prices, moving $5/mo over here and $10/mo over there so they can talk about lower prices when really nothing has changed. They’ll add a $5/mo MMS charge for the current and next iPhone because they can, and move things around to keep the same (or even more) cost structure to the customers plan.

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Posted in Apple. Tagged with , , .

By Anthony
May 7, 2009

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