Brian's Brain

No good deed goes unpunished. I wonder if that's what AT&T is thinking right about now?

I've mentioned the 'razor and blades' business model many times in past print and online writeups. Basically, it involves an initial subsidy of one hardware platform (the razor) to 'hook' potential customers, coupled with high prices of associated products and/or services (the razor blades) to ensure that the manufacturer still eventually turns a reasonable profit on the package. Here are some common 'razor and blades' examples from the consumer technology sector:

That last one is the subject of today's post. AT&T, Apple's (at least at the moment) sole U.S. cellular service provider partner for the iPhone series, caught abundant grief in conjunction with last week's iPhone 3G S introduction:

• MMS (Multimedia Messaging Service) support isn't yet ready,
• Nor is tethering capability (or associated pricing plan details, for that matter) for phone-as-modem service
• AT&T's HSPA network isn't 7.2 Mbps downstream speed-capable, and apparently most egregious of all...
• Many owners of prior-generation iPhones weren't offered new subscriber price-matching upgrades to Apple's latest-and-greatest handset

Apparently a lot of folks don't realize (or don't care) that when they bought a iPhone 3G through the Apple/AT&T partnership, they were buying it below AT&T's acquisition-from-Apple cost. Therefore, they were in effect paying a surcharge each month of their subsequent two-year contract to make up the difference to AT&T. This is a common practice in the U.S. cellular service market (in contrast, not so common in Europe, for example), thereby explaining the additional termination fees you pay if you want to cancel your account early. It also explains why most phones sold in the U.S. are 'locked' to a particular carrier even if a removable SIM card (in the case of GSM-technology handsets) would otherwise let you move your plan from one phone to another.

As initially described last Monday, AT&T offered upgrades from prior-generation iPhones to the iPhone 3G S at $199 (16 GByte) or $299 (32 GByte) plus an $18 upgrade fee, as long as you were near the end of your two-year contract (with 'near' being a plan-dependent variable...more expensive plans got more flexibility). This, along with $99 for the 8 Gbyte version of the prior-generation iPhone 3G (which I frankly agree is the real news here) is the same pricing offered to new subscribers. But for many AT&T account holders, upgrades cost $399 (16 GByte) or $499 (32 GBytes). And, if you wanted to buy an iPhone 3G S on a no-contract (but still AT&T-locked) basis, it'd cost you $599 (16 GBytes) or $699 (32 GBytes).

Part of the reason for the uproar had to do with timing. The original iPhone went on sale in the United States on the evening of June 29, 2007. The iPhone 3G started selling in the U.S. on July 11, 2008. The iPhone 3G S goes on sale tomorrow morning, June 19. Do the math, and you'll realize that original iPhone owners who bought their handsets on the intro date aren't eligible for $199/$299 upgrades yet...with even 10 days' worth of patience apparently not being a virtue in this 'instant gratification' culture of ours.

Now consider that significant number of original iPhone owners probably updated to the iPhone 3G one year later (and a bit less than one year ago). This situation leads to the second fundamental reason for the confusion...a perceived (but not actual) deviation from prior precedence. When folks upgraded from the iPhone to the iPhone 3G, they needed to extend their existing contracts to fill a full 2-year going-forward gap. They also got subsidized pricing, but that's because the original iPhone wasn't subsidized by AT&T; it cost $499 (4 GBytes) or $599 (8 GBytes).

Yesterday, AT&T ended up relenting in the face of public backlash, but only to a degree. If you would have been eligible for the $199 or $299 upgrade price in July, August, or September of this year, you'll be able to buy in to the upgrade early (i.e. beginning tomorrow), but only for a 'limited time', and only if your monthly bill is high enough. Frankly, though, I don't see what the big upgrade hurry is.

Granted, the iPhone 3G S user interface experience is a bit snappier courtesy of the system's faster and more advanced ARM CPU and IMGT graphics cores, along with more abundant system memory. And you'll also gain access to a few incremental features (video capture, voice recognition, a magnetic compass, integrated Nike+ support, etc) that won't be available on the iPhone or iPhone 3G even after the v3 firmware upgrade due to prior-generation hardware limitations. But as I stated earlier in this writeup, you can't exploit the latest phone's 7.2 Mbps HSPDA capability right now anyway, since AT&T's network isn't yet upgraded. And MMS and tethering, which existing iPhones will also eventually support, aren't 'live' with AT&T yet, either.

So what's the rush? Is enhanced EDGE that slow, original iPhone owners? Is it that important to have the latest and greatest bauble right now, especially in this time of fiscal constriction? Haven't we as a culture learned yet the value of thriftiness, and of subsequent consumption restraint? And if you must have the iPhone 3G S right now and aren't a lowest-upgrade-price candidate, can't you console yourself with the thought that you can sell your 'old and decrepit' existing handset as partial compensation? Heavens, you could even cancel your existing contract and set up a new one, paying an early termination fee but getting a $200 cheaper iPhone 3G S in exchange. Do the math, people!

In closing, I'm curious; for those of you designing hardware that you're considering offering for sale under a subsidized pricing model, does AT&T's experience of the last two weeks give you any pause?