When Apple introduced the new iPhone 3G on Monday, they changed more than the hardware. They changed their deal with AT&T, giving up the cut of monthly revenue from iPhone users. Instead, AT&T will “buy” iPhones from Apple, and then sell them at a lower price to customers to get them into a 2-year contract, and (hopefully) hooked.
This is, after all, how it’s usually done in cellular-land. But Apple had gotten a lot of press for their “game-changing” deal with AT&T (and AT&T had gotten a lot of criticism). So did AT&T suddenly gain the upper hand? Did they outsmart El Jobso? Did Apple stumble here?
Hardly.
According to this Marketwatch piece, the iPhone 3G subsidies are expected to cost AT&T around $1 billion this year.
The new entry price point for the 3G iPhone - $199 - is killer, and is going to move a lot of the devices to customers who’d been unable or unwilling to part with $399 or higher before. And a lot of that difference is coming out of AT&T’s pockets. AT&T, for their part, has a plan here; cellular companies have this game worked out pretty well, having subsidized cell phones nearly since their introduction in order to lock-in long-term revenue.
But back to the original question: was Apple willing to give up their monthly cut of all those locked-in customers just to move more hardware? Did they give up on trying to carve out a recurring revenue stream from their ground-breaking phone?
No, they just moved on to the next phase of their plan.
The key is the App Store. Apple has created a new market for software applications - the iPhone - and has made itself the single retail outlet for selling software into that environment. There are some exceptions - you can deploy apps within your own organization, or to a hundred or so iPhones ‘ad hoc’ - but for pretty much everyone else, if you develop an iPhone app, you’re going to sell it through Apple’s App Store or not at all. And there are going to be a lot of iPhone apps sold.
Steve Jobs spent twice as long during his keynote talking about the App Store, and applications available for the iPhone, as about the new iPhone itself. Including the enterprise elements and the SDK, it was almost 4 times as long. Clearly, this is a big deal to Apple.
Having unleashed the iPhone as a target platform for 3rd-party developers, and then set themselves up to take a cut of every application sold for it, Apple wants as many iPhones in the field as possible. So they’re letting AT&T keep all the monthly revenue in exchange for subsidizing the rollout of the new iPhones to millions of new subscribers (I predict they easily beat their 10-million-iPhone target for 2008), all of whom will be hungry for new apps for their new toys.
And Apple stands to profit from every single one.
“Skate to where the puck is going to be,” indeed.
Update:Reuters reports that “some estimates” put the impact of the lost monthly revenue from AT&T at 3c/share.
But Piper Jaffray’s Gene Munster projects hundreds of millions of dollars in revenue for the Apple Store, which would dwarf the lost revenue from AT&T, even by his “conservative” estimates.
