Doing the math: 3G iPhone not really cheaper in the long run

There's evidence of a lot of savvy business deals having taken place between AT&T and Apple, with both sides getting more of what they want from the new iPhone, while customers get the impression that they're getting a better deal too.

The big news from Monday was the dramatic drop in the up-front price for Apple's next-generation iPhone, made available in the US through AT&T. While that makes the barrier to entry somewhat easier for new buyers, and probably raises AT&T's gambling stakes for the new device, in the end, new two-year contract holders (the minimum allowable for the iPhone) will end up paying much the same, assuming they use 3G service.

With the help of a revolutionary tool called a calculator, independent journalist Tristan Louis -- himself the founder of Internet.com, a former vice president and technologist for the world's largest bank, and my former colleague in ventures long past -- determined that once fees and contract subscription rates were taken into account, after two years' time, subscribers will actually have paid $39 more.

It's a negligible amount, but a clear indication that the iPhone isn't really getting any cheaper, either.

"Over the two year life of the plan required by the contract, the cost would be $1680 for subscription," Louis wrote yesterday for his personal blog. "Tack on the $199 to that price and you end up with a total of $1879 over a two year period, roughly $40 more than the outlay for first generation devices. The interesting thing here is that the price is roughly the same even though the entry point is lowered by a third. This plays to the perception that the price has been drastically lowered, but the truth of the matter is that it hasn't changed much."

So why and how does there continue to be such a buzz over the 3G iPhone being somehow cheaper? Louis talked with BetaNews this morning.

"Apple has managed to create the impression that it is different (a.k.a., Steve Jobs' reality distortion field) and has a wide group of followers who think it can do no wrong and is 'a very special' type of company," he told us. "What the company has done is translate a smart emphasis on design with masterful marketing presentations that gets people to leave the analytical part of their brain at home."

In Louis' view, the new deal between AT&T and Apple appears to give both sides a little more control over their own exclusive territories. By making in-store activation mandatory, AT&T brings the iPhone's business model more in-line with those from its other manufacturers, at least reducing the likelihood that the device will ever be unlocked before it's locked. On Apple's side of the table, it gets more control over applications -- a market Louis feels AT&T couldn't care less about anyway, but at least the type of market which Apple has already shown it can develop to its enormous advantage.

"Imagine being able to build a marketplace where one would sell software produced by someone else," Louis writes. "It would look like the type of marketplace one would use to sell things like music, or maybe movies, or TV shows. Oh wait, I know, it would look like the leading marketplace for selling music. You know, the one by Amazon...uh, no, not that one. Who makes that leading marketplace? Oh yeah, Apple with the iTunes store."

Key to Apple's control over that new market, Louis believes, is its new push activation service, where customers are notified regularly of new apps' availability through the iPhone's online store, without expending too much of the phone's power. Many third-party apps on other platforms -- not just on smartphones -- have a tendency to poll their respective servers regularly for updates, sometimes every hour. That's a drain not only on power, but on resources and bandwidth as well; and as Apple's engineers demonstrated at WWDC this week, their push architecture seeks to avoid that mess.

High Scalability blogger Todd Hoff saw the immediate benefits of that architecture, writing on Monday, "Having a large number of apps constantly polling for updates sucks down battery power faster than vampires at phlebotomist convention. So Apple's logic is sound. Keep a single connection over which data is pushed and work on the phone is minimized. You also maximize battery life and maximize bandwidth usage because data can be aggregated on the server side and be sent in large chunks rather than a random distribution of small packets."

But the system has also fueled skeptics who foresee the capability of Apple to have first-hand knowledge of what it is their users prefer to run on their systems.

WebWare blogger Josh Lowensohn foresaw Apple using this opportunity to mine the data emerging from its applications store to create audience segments that could later be exploited through targeted advertising, perhaps on some future platform. "Why not find out which apps are getting the most use and offering the developers special licensing deals? Better yet, why not sell that information to third parties like advertisers to help them work with highly used apps to sell ad units or sponsorships while getting an additional cut?" Lowensohn wrote on Monday.

Tristan Louis, meanwhile, sees a scenario where Apple couldn't care less about what it makes from iPhone hardware, if anything. In a similar fashion to how HP turns its printer customers into perpetual ink consumers, he foresees the future of Apple as a software company, borrowing its already successful model for iTunes and juxtaposing it onto applications. He cited news from WWDC that stated that while record labels receive data on how their wares are selling on iTunes once per week, iPhone app developers may only get reports from the App Store once per month, at best.

"Of course, one would assume that since Apple is such a great company and so developers friendly, it will share this information in almost real time with the application developers. Except it won't," Louis writes. "The other thing this does is that it provides Apple with a central system that knows what users are doing with their iPhone. This is basically focus groups on a global scale and it's very impressive."

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