The iGouge
January 20th, 2007 by scaredpoet

Okay, more iPhone ranting.

It’s normally standard practice in the US for wireless mobile carriers to lock people into two-year contracts known as “service commitments,” in which a customer pledges to stick with that carrier for one or two years, in exchange for a discount on a phone. This is often how these carriers can offer “free” or outrageously cheap phones and still make money; the idea being that in exchange for a deep discount on a shiny and slick new handset, you’ll keep paying your bills every month to that carrier so that they can recoup the real cost of the phone over time. If you leave early and break the contract, the cell company charges you an “Early Termination Fee,” which can run between $150 and $200.
This practice is known in the cell phone world as a “subsidy.” It is also part of the reason why most phones in the US that carry a wireless company’s brand cannot be transferred to another cell company. Most have placed what is known as a subsidy lock on the equipment, to ensure that no one can take that “free” phone and use it somewhere else.
Makes sense, right? Most people in the US either can’t or won’t fork over several hundred bucks for a cell phone, so in excahnge for being locked into a contract for a while, the cell company eats part or all of the cost of the phone. A fair deal… or, is it?

Well, according to one research firm, that’s definitely not the case with the iPhone.

When it launches this June, the iPhone will cost $499 for the 2GB model and $599 for the 4GB model, with that same 2 year contract that everyone else is locked into. Quite pricey for something that requires a contract, isn’t it? So, the cost to make this phone, with all the whizbangs it’s supposed to offer, must be outrageous! Given Cingular’s standard $200 termination fee, you’d think the real cost for this phone must be in the $700 to $800 range!

Well, a company known as iSuppli makes it’s living doing something I wish I could do: take apart new gadgets, find out what makes them tick, and then calculate the cost of manufacturing that device. While no one outside of Apple has been able to dismantle an iPhone yet, iSuppli has made some educated guesses on that what might go into making one, and according to what they told Wireless Week, the iPhone is suprisingly cheap to make!

iSuppli estimates the 4 Gb version of the iPhone will carry a $229.85 hardware bill of material (BoM) and manufacturing cost and a $245.83 total expense, yielding a 50.7% margin on each unit sold at the $499 retail price. The 8 Gb iPhone will sport a $264.85 hardware cost and a $280.83 total expense, amounting to a 53.1% margin at the $599 retail price.

So let’s get this straight: For each iPhone sold, Cingular (or rather, “the new AT&T“) and Apple will get to divvy up over $250 in pure profit. And that’s all fine and good! After all businesses are, well, in the business of making money. But even with such a wide profit margin, Cingular still wants to lock people into a two-year contract, and still intends to charge people a termination fee if they leave early.

Uhm, why?

Cingular certainly can’t argue that they’re taking a hit on this phone. They’d be making money hand over fist! So, if there’s no “gadget welfare” going on here, then the only justification (if you can call it that) for locking people into their service agreements is simply because they can.

It’s interesting to see that Cingular, being rebranded as “the new AT&T” is going back to AT&T’s old ways. What’s next? Will “the new AT&T” start preventing people from buying any phones at all, and instead force people to rent them like in the old days?

Well, Sun has sued Apple over the iPhone trademark, so it may end up not being called this. Maybe the “iGouge” is a more fitting name after all.

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