New iPhone: Lower price, higher cost

The new iPhone 3G, announced yesterday and available next month, costs $200 less to buy than its predecessor. But the new version (click on the image for a closer look) will actually cost a little more to buy and use in the long run than its predecessor, due to higher service costs.

The new phone is $200 in its 8-GB version and $300 in its 16-GB version, compared with $400 and $500 for the older iPhones of the same capacity. An unlimited data plan with the new device is $30, $10 a month more than with the old iPhone. (The least-expensive voice plan, with 450 minutes a month, is the same price as with the old iPhone, at $39.99 a month.) Multiply the $10-a-month extra data cost times the required 24-month contract period and you're on the hook for $240 in additional charges for owning the new iPhone rather than its predecessor.

The hike in fees may be rooted in a change in the business arrangements between AT&T and Apple for the new iPhone. With the original iPhone, subscribers paid full price for the device, even though a two-year contract commitment was required—an unusual arrangement. The new version reverts to a more traditional business model for the industry. That is, AT&T will buy the phones from Apple and sell them to customers for less than they paid. Then they'll devote a part of subscribers' bills every month to reimbursing themselves for that subsidy.

So customers will pay a little more to buy and use the new device as the old, but they'll pay that slightly higher cost more slowly. The lower upfront cost likely will, as Apple's Steve Jobs predicts, allow some people to buy the device who couldn't swallow the $400 price tag for its predecessor. And, at $200 the iPhone 3G will be very competitively priced, given that plenty of plain cell phones that lack the iPhone's versatility cost that much or more. Also, new iPhone owners are getting a faster, more capable 3G network, rather than the slower AT&T EDGE (2G) network used by the older iPhones (the data plan for which will remain priced at $20 a month, according to AT&T).

All that said, the headlines proclaiming the new phone as cheaper than the old don't quite tell the whole story.

If you're looking for other money-saving tips, see our recent post, "Cell plan extra charges: Why and what you can do." Additional information on ConsumerReports.org will also help you find the best cell phone deals as well as other ways to cut your cell phone bill (available to subscribers only).

—Paul Reynolds

Comments

[Jason]

Can I get just the data plan from AT&T or will I HAVE TO bundle it with the voice plan?

[Phil - Fort Wayne, IN.]

Last I checked ATT data plan for 3G was always 10 dollars more, so I don't see a hike anywhere, I just see them offering the proper plan for the proper data services.

[Tim]

Thanks Mike. That explains a lot.

As for text messages, my wife and I are too old for that :). And my wife's plan doesn't include text messaging. I even tried to have it taken off the account, but it's a flat fee for iPhone customers.

I'll probably just keep my iPhone for now until I see more of what the 3G has to offer. I'm sure CRO will have test results sometime in July.

[Michael Gikas]

Dear Tim,

You raise a good point. However, it appears from the demo that Apple's GPS Navigation application may not provide proactive, voice-enabled, turn-by-turn directions, as do Verizon's and Sprint's and Tel Nav's services. While the "dot" moves along the map, you'll probably have to keeping hitting the Next button for step-by-step directions. And it probably won't warn you if you miss your turn. We've seen this is the kind of limited functionality on the Black Jack II with AT&T service. Not bad for free, though not quite on a par with the fee-based services. Who knows, maybe proactive, voice-enabled navigation will be an option when the new iPhone debuts on July 11. We'll just have to wait and see.

--Mike Gikas

[Greg B]

Also don't forget the extra money you'll have to spend for text messages. Those 200 texts bundled into the 2G iPhone's $20 plan are no longer included. It'll cost you $5 for those now. One of the arguments for the higher cost is that the phone is now running on the faster 3G data network, and no longer on the slower EDGE. But this leads to what I feel is the biggest issue at hand: the spottiness (to say the very least) of AT&T's 3G network. A phone is only as good as the network it's on, and AT&T leaves a lot to be desired in this area. Unless you live in an a semi-major to major urban area, a 3G phone on AT&T does you little good.

[Todd]

Realistically, no one is going to buy a new iphone today at $400. I paid $700 for my iPhone... so it's still cheaper. Plus for $40 bucks more, you get 3G and GPS. Sounds like a price i would gladly pay.

If anyone wants to trade their 3G phone for mine, I will be happy to throw on an extra $50 on top of the trade... any takers?

[Tim]

I agree with Dan's comment. I may be wrong here, but the author didn't mention the fact that GPS navigation is included with the iPhone, a $10 service on the AT&T network. Maybe that's why the iPhone plan is going up by $10. If that is the case, then wouldn't the consumer be benefiting from this?

I have a first generation refurbished iPhone that I purchased at an AT&T store in March for $249. If the new iPhone 3G is that much faster and better, I may upgrade and sell my phone on eBay.

[Dan]

So, all in all, the new iPhone will cost $40 bucks more then the previous ... (New phone is $200 + $30x24 = $920 compared to old phone being $400 + $20x24 = $880). I know where the author is going, but whoop-dee-doo.