Chicago (IL) – The ugly part of the iPhone 3G will remain AT&T’s service contract and it isn’t particularly hard to figure why Steve Jobs decided not to go into 3G service pricing during his keynote. Before you get all too excited about the new $199 entry-level price of the device, make sure you are aware of what you are buying how much it will cost and what other unexpected surprises may wait for you along the way. Here is what you should know before walking into an AT&T store on July 11.

Strangely absent from Steve Jobs' iPhone 3G introduction during his WWDC keynote on Monday was AT&T and service plans for iPhone 3G users. Later that day, the carrier issued a press release and provided 3G pricing information to Gizmodo. It's now clear that, under the new business model, iPhone users won't be getting special treatment from AT&T anymore, which remains exclusive US carrier for the handset. Apple and AT&T will begin selling iPhone 3G on July 11 in the U.S. and 22 other countries and plan to be adding 48 more countries by the end of the year. Apple no longer has a revenue sharing agreement with AT&T in place. The carrier now subsidizes the handset by an estimated $200. And yes, of course AT&T wants that money back from you.

There will be some new inconveniences as well. A new sales policy will require you to sign a two-year service contract in-store to get the phone, a move that is designed to make unlocking and gray-exporting much less attractive and more expensive. The original data service plan has been phased out, which means that you will have to choose from regular AT&T packages. Compared to the initial $20 EDGE iPhone data plane, you will get 3G for a $10 premium (the $20 plan is no longer available) and you will actually end up paying $160 more over the course of the contract for the phone and service. It really depends on your viewpoint whether that makes sense or not: 3G speed is nice but the simple fact that AT&T has replaced its original iPhone data plan with a plan that comes at a 50% increase is, in our opinion, a rather questionable move.

However, the 3G premium is not especially unexpected: It is in line what many have expected before and it is in line with the strategy AT&T laid out by saying that it "hopes iPhone 3G will drive increased sales volumes and revenues among high-quality, data-centric customers", adding that the average monthly revenues per iPhone subscriber are nearly double the average of its overall subscriber base. If you just look at the iPhone, the device’s price has been decreased. But if you look at the complete package, the lower price is deceiving and actually false. So, the claim that the iPhone 3G offers twice the speed for half the price is only true for Apple’s advertising. AT&T should rethink if it is advertising this claim on its website. Any bets on when the first lawsuit for false advertising will be filed?

Where, when and how do I buy an iPhone 3G?

In the U.S., you can purchase iPhone 3G starting on July 11 in Apple Stores and in more than 2,200 AT&T retail stores and kiosks. The phone will be available in 22 countries on day 1. Use the iPhone country locator to check when the handset arrives to your country and which carrier is going to sell it.

Gone are the days when you could walk into the store, buy the handset and activate it in-home later, using iTunes. Now you have to choose your voice plan and sign a two-year service agreement in-store. Your phone will be activated in-store, at the time of purchase. Plan your iPhone 3G purchase ahead because additional paper work will take at least 15 minutes. It will be interesting to see how AT&T prepares to handle lines on day 1. The new sales policy also means there will be no online purchases: You will have to walk into the store, sorry.

If you are already in the middle of a two-year contract with AT&T, it will start over upon the purchase of the new iPhone, and not stack on top of itself – just like it is the case if you were to upgrade to any other new and subsidized phone. If you were unlucky enough to have purchased an iPhone on or after May 27, 2008 through AT&T or Apple Stores, AT&T will swap it for iPhone 3G before August 1, charging a 10% restocking fee. All other iPhone owners will also be able to upgrade to iPhone 3G but AT&T has not yet decided on an upgrade price.

Each customer will be limited to buying a maximum of three units in AT&T stores. If the original early termination policy remains in place (AT&T recently has removed its iPhone terms of service from its website and put existing iPhone plans under the general wireless service agreement terms), then you will be able to return the iPhone within 14 days of purchase and get a full refund of the device price if you return the phone. Within the 14-30 day period, you could not get the refund anymore, but you could drop the AT&T service plan and escape the $175 early termination fee. After 30 days, you will have to pay $175 when cancelling the service, minus $5 per month of usage.

    
How do I unlock iPhone 3G for export or use with any carrier?

You will have to get the phone first and in order to do that you have to commit to a two-year contract in-store. What you can do is sign the contract, get the phone and then cancel the contract after 30 days, as you are not required the return handset if you cancel after 30 days. Cancellation will incur a $175 early termination fee, in addition to the $36 activation fee. If the original terms of use of the iPhone remain in place you may be able to escape the $175 fee by cancelling the service within 30 days of purchase, but we have no confirmation whether this will be the case or not. Currently there is no unlocking solution and it is unclear how strong iPhone 3G's protection is.

AT&T's Mobility chief Ralph de la Vega confirmed that the carrier is working with Apple on possible penalties for users who don't activate the phone within 30 days.

Analysts estimated that at least 25% of iPhones were bought to be unlocked and used with other carriers or exported. Apple still made money with unlocked the iPhones as it made a hardware sale that was estimated to carry a 40-50% margin. Apple only lost out on service revenue it was entitled to under the revenue sharing agreement with the carrier. AT&T neither won nor lost as it couldn't collect service revenue from unlocked handsets which were mostly used in countries around the world where AT&T does not operate.

Read on the next page: Service plans, $74.99 monthly cost, EDGE-3G and the $2000 iPhone

What service plans will be available?

The original plans created exclusively for the iPhone no longer exist, except for the existing iPhone owners. These convenient all-in-one plans were priced at $39.99 (voice only) as well as $59.99 and $79.99 for 450, 900 and 1350 minutes respectively. The data-inclusive plans included unlimited EDGE data access, unlimited mobile-to-mobile calls, rollover minutes, visual voicemail, 200 text messages and unlimited night and weekend minutes (The $39.99 plan had 5000 weekend minutes).

With the old plans gone, iPhone 3G users have to choose from the general AT&T voice and data plans. The only plans not available to iPhone 3G users are GoPhone (previously available to iPhone users who failed a credit card check during the iTunes activation), Pick Your Plan and Pre-paid plans.

AT&T's voice plans for both individuals and business customers start at $39.99. Keep in mind that 200 text messages from the phased out iPhone-exclusive plans are not included. To get those 200 free text messages, you can upgrade voice plan with a $5 Messaging 200 service. An unlimited 3G data plan for consumers now stands at $30 (a $10 increase over the data plan for the first iPhone) and $45 for business. Both data plans include email/web traffic and Visual Voicemail feature.

Why will my entry-level service monthly bill come at $70+?

A $10 increase for data plan has led many to wonder if AT&T is ripping iPhone customers off, but that isn't really the case – the new price applies to all AT&T customers, not just iPhone owners. However, you will now pay $74.99 a month, $15 increase, for services that were included in the first iPhone entry-level $59.99 plan.

iPhone buyers keeping a close eye on prices are not going to like this $15 increase, but there's little you can do. You can choose not to upgrade voice plan with 200 text messages, decreasing the difference to $10. If you drop the data plan, you will end up with the same $39.99 voice plan as the previous iPhone (but lacking 200 text messages). Without the data plan, you will still have Internet access over public Wi-Fi hot-spots or your home wireless network. Most users may want the unlimited 3G data plan as the iPhone value proposition is closely tied to Internet usage.

But you will have to pay $10 premium for the fact that AT&T upgraded unlimited data plan from EDGE to 3G. Don't get us wrong, we don't see the problem with that. After all, you do pay for speed in flat rate DSL service, so why should mobile Internet be any different? It is questionable if 3G justifies a 50% price increase over EDGE (especially if EDGE is no longer available with the new devices) and it depends on your paycheck whether those $30 are affordable or not. 3G is what the original iPhone and AT&T should have supported and the price increase certainly leaves us scratching our head.
In fairness, we should mention that both Verizon and Sprint are also charging $30 for their data plans.

I live in an EDGE-only area. Can i choose unlimited EDGE data plan for $20?

AT&T says it will have invested more than $20 billion in network upgrades and improvements between 2005 and the end of 2008. Its 3G network is currently available in 280 leading US metropolitan areas and will expand to nearly 350 metro areas by the year's end, with plans to incrementally upgrade 3G speeds during the next few years. All smartphones and PDAs on AT&T's 3G network are currently capped to 1.4 Mb/s.

But not everyone lives in metropolitan areas. So, do you get to choose EDGE data plan if you live in an area with only EDGE access? Unfortunately no, as AT&T has axed its unlimited EDGE data plan. If you want EDGE-only unlimited mobile Internet, you will have to pay for an unlimited 3G data plan, which is the reason why some consider such a move unfair towards EDGE-only people.

How did Apple manage to cut the iPhone 3G price in half? Is it losing money?

No, Apple is the last company to be in the business to agree to a money-losing model. The new strategy kills the revenue sharing agreement, replacing it with a carrier subsidy business model. AT&T used to give Apple an undisclosed portion of the service revenue it collected from each iPhone subscriber, over the course of two years. "Under the revised agreement, which is consistent with traditional equipment manufacturer-carrier arrangements, there is no revenue sharing and both
iPhone 3G models will be offered at attractive prices to broaden the market potential and accelerate subscriber volumes," AT&T stated.

Although Apple sells the new iPhone 3G at half the price of previous model, the company isn't losing money because AT&T is subsidizing the cost of the handset with an estimated $200. Apple is apparently whole-selling the new iPhone 3G to the carrier at the same $399 price point it retailed the first generation 8 GB iPhone. Since AT&T now keeps all the money it collects from iPhone subscribers to itself, it subsidizes the handset out of what it used to pay Apple under the previous sharing agreement. If we divide the $200 subsidy by 24 months, we end up with $8 per month – the most probable amount AT&T paid to Apple under the old agreement.

So, you get the new iPhone 3G at half the price, with AT&T paying Apple the other half in advance. But since AT&T no longer shares its revenue with Apple, it collects $200 over the course of two-year agreement from you.

A $2000 phone? Where do I sign up?

Dropping the price by $200 was smart move on both Apple's and AT&T's part designed to lure more people into stores. In that sense, Apple knows that an idea of getting not just any phone, but the iPhone 3G at $199 for most people sounds like a great idea. But the hardware price is drop in a bucket when you consider the total cost of ownership (TCO), because the accumulating service cost is really what makes the iPhone (and any other data capable phone) expensive.

For instance, the first 8 GB iPhone cost $399, with the cheapest $59.99 per month service adding up to $1439.76 over a 24 month period, bringing the total cost of ownership to $1838.76. The new 8 GB iPhone 3G costs $199. AT&T's entry-level voice plan at $39.99, $5 SMS upgrade and $30 unlimited 3G data plan bring the monthly service to at least $74.99, or $1799.76 over the course of the contract. That elevates the iPhone 3G's TCO to $1998.76. Over the two years period you'll pay $160 more, even with the 50% price cut.

AT&T's data plan price increase causes the disparity. If you are on a budget and you are already using the iPhone, it might not be a bad idea to keep the $160 for yourself and stick with the old iPhone - if you don't need 3G mobile Internet.