Learning to deal with the downsides of a $3000 iPhone

Posted by Rob Enderle, Principal Analyst, Enderle Group

Well, the other shoe finally dropped along with Apple’s stock price and if you want the best iPhone with the best phone service it is going to cost you.  While this clearly isn’t a problem if you are a billionaire, for the rest of us signing the related contract will likely be an “Oh my God, $3000!!!” moment.   

 


Apple iPhone gallery...


Most folks will likely opt for a less expensive plan and they range from $60 to $100; likely, most will pick the $80 plan with 900 minutes (those extra minutes can be expensive). That’s 30 minutes per day in a 30 day month, so I’ll bet a lot of those folks get really surprised by the bill they actually get if they use their cellphone during business hours. (In case you did the math that’s only around $2500 plus overages, taxes, breakage, and the cost of replacing the battery in 12 months).  

Advice, if you get one, learn to speak quickly and be brief, but I agree with a number of my peers this much money, for what basically is a Beta product, just seems insane.
   
This cost is one of the reasons this class of phone hasn’t been that popular with consumers except when connected with really aggressive price plans. To consumers, $2500+ is what they would typically pay for a car for their kid and not a phone. This is why most smart phones are actually supplied and paid for by businesses today.   

Is Microsoft helping Apple cut cost 50%?

Now, Microsoft Mobile is rumored to be helping Apple make future versions of the iPhone acceptable to business and, over the next few months as the iPhone goes through its second and third generations, you’ll see if the rumor is true.   If this effort is successful, a future version of the iPhone may be acceptable to business and will be able to move into the market much like a RIM Blackberry, Palm Treo, T-Mobile Dash, and Samsung Blackjack have.  

Microsoft is on an aggressive interoperability campaign right now and is also working with a number of Linux vendors. Bill Gates and Steve Jobs were very cordial when they got together a few weeks ago and Steve has to realize that it will be very difficult to move a $3000 phone package, if folks can’t expense it or pay for it with pre-tax dollars like the other phones in this category.  

Using pretax dollars is, in effect, like getting up to 50% off of the phone even for small businesses and, for a $3000 cost that $1500 difference could help in selling these phones a great deal.   

Let’s put this in perspective: When you factor in the full price of an iPhone and $100 monthly service, you can buy the hot new Dell M1330 XPS Laptop with almost all of the toys (LED backlit screen, RAM Drive, Hot Red Color, high end graphics, extended warranty) and still have enough money left over to buy a large screen TV for what you are going to shell out over the next two years for an iPhone.  

Regardless, with a lot of the analyst firms and publications suggesting companies block iPhone access, Apple will have to deal with this and will likely have that cooked by the generation 3 device; the 2nd generation  is expected before year end.  I think it is likely that Microsoft is actually helping, they have no real reason not to, and that would provide the quickest way for Apple to gain similar cost and price advantages to other competing products.   

 

Read on the next page: Should cellphones be unlocked? 

 


 

 

 

 

 

Why generation 2 and 3 will be better

The reason a generation 2 or 3 product is generally better than a generation one is you can cost reduce future generations based on technical and manufacturing scale advantages, and you can factor in actual customer feedback.  Recall that 18 months after the first iPods became available, they were $100 cheaper, had twice the capacity, and were vastly more reliable.
 
For instance, we already know the generation one phone doesn’t support Flash, doesn’t play games, won’t convert songs to ringtones, doesn’t support instant messaging, has limited email support, and won’t let you connect directly to Apple’s iTunes Music Store (you have to go through a PC) - all of which are likely desired by many of the potential users. And the promised YouTube coverage is apparently not as good as advertised either right now.  

In addition, initial tests indicate you need to charge this phone every night. Each charge is one cycle in a permanent battery which only has an estimated 300 cycle service life (I’m thinking the California Bar Lawyers will love this).  

For a phone and service you are paying up to $3000 for, having the battery go south one year into the two year contract is likely going to be a problem for a lot of people. As a result, this clearly should be on the short list of things to get fixed and I don’t have to tell you what the combination of a metal case and a glass screen will mean if you drop this phone. Boy, you talk about your $3000 “oh Crap” moment.  

I still can’t quite get to the point where I would consider paying nearly twice what I would pay for a laptop for a phone I can’t expense, but clearly there are those that disagree.   

Remember, there is supposed to be 30 day grace period and that means you can play with this for a few days and get most of your money back (but I’d make sure I knew how long you actually have as it is different State by State). If it turns out you don’t like the phone exchanging it is a lot less painful then paying the entire $3000 for something you don’t like.  

Then again if you are Steve Jobs or Paris Hilton, this may not be a problem.  

In a year, and by the time this is fully cooked, this should be a really great phone at a much better price. For now, go with caution and remember that 30 day window.

I’m dying to see what happens to the large number of folks who are likely camping out so they can sell the iPhone they bought on Ebay. Bids topped $1500 (but have been pulled) and are likely to hit $3000 before this is over.  I’m thinking a few of those folks are in for an unfortunate surprise this time around as people suddenly realize we are approaching $6000 ($3000 for the phone and $3000 for the two year service plan) for a phone. You kind of wonder how stupid someone, who paid this kind of money, is going to feel when a cheaper and better iPhone comes out in October - likely coupled with more aggressively priced service.  

Should cellphones come unlocked?

You know, in much of Europe and Asia you can buy cell phones that are unlocked.  In fact, in Europe in particular, in many places it is actually illegal to do what the US cellphone industry does regularly. This is one of the reasons they get better phones.

For instance I’ve been using the HTC Touch, which is comparable to the iPhone but supports Exchange and I can expense it for business (because that is how it is mostly used).  It prices out similar to the iPhone but I can use any service I want and can choose between any of the GSM carriers. If you want, you can actually buy one now for about $600 and, once again, no lock-in to a 2 year AT& T phone plan.  

While an unlocked iPhone would likely cost $200 more, I think folks should have the option of being able to switch out their phones whenever they want without having to pay a penalty. And if the expected lower cost plans show up, you could also switch more easily to them.  

Nokia agrees phones should be unlocked and has started selling their high end smart phones unlocked bypassing the carriers much like they sell them in Europe. This gives you, the consumer, a choice as to which carrier you use and flexibility in that, since there is no lock in, you can change carriers nearly any time you want to if you don’t like the one you have.   

I think the Europeans got this right, and I imagine in about 10 months when the iPhone batteries start failing, a number of initial iPhone purchasers will agree.

Getting rid of your old phone and wrapping up

Seriously do you really need a new phone right now?  Did someone screw up your calendar and you suddenly think its Christmas? Anyway, for those of you who absolutely have to have one of the first iPhones and need to dump your old phone, there is a service called Cell for Cash that helps you get some money back for your old phone. It’s worth looking at.
   
Folks, seriously, do you really need music and video on a phone this badly?   In any case, after you’ve played with the phone for a week or so, let us know what you think.  Was it worth it or did Steve and company pull a PT Barnum on you?  

 

Rob Enderle is one of the last Inquiry Analysts.  Inquiry Analysts are paid to stay up to date on current events and identify trends and either explain the trends or make suggestions, tactical and strategic, on how to best take advantage of them.  Currently he provides his services to most of the major technology and media companies.