August 19, 2017

Why No Phoneless iPhone?

I know the iPhone is like so last week, but I want to ask one more question about it: why does Apple insist on users registering for an AT&T account? Officially at least, you have to agree to a two-year contract with AT&T cellular before you can activate your iPhone, even if you will never use it as a phone. (There are ways around this, but Apple seems to wish they didn’t exist.) Which is a shame, because the iPhone is a pretty nice WiFi-enabled portable computer that (to me at least) is less attractive because it’s tied to a two-year AT&T contract.

Of course AT&T is giving Apple a cut of its revenue from the contract. According to rumor, the cut is $3 per month for each user, or $11 per month for users who switch to AT&T from other carriers. Given that about half of iPhone customers switch from other carriers, that’s an average of $7 per month per user, or about $170 total over two years.

But that $170 doesn’t answer the question, because Apple could still sell a phoneless iPhone for, say, $800 while the AT&T iPhone costs $600. If you think Apple still comes out behind at $800, then feel free to pick a larger number. There must be some price point at which Apple is happy to sell a phoneless iPhone, right?

I can see only two reasons why it might be rational for Apple to refuse to offer such a product. It can’t be difficult technically – all they have to do is change the activation procedure so that it doesn’t require the user to sign up for an AT&T contract. But there are two possible reasons.

The first is that the market for a phoneless iPhone is too small, at the price point that they would have to offer. If hardly anyone would buy the device at $800, then it might not be worth the trouble to create another option in the product line. This seems unlikely.

The other reason – the only other possible reason, as far as I can tell – is that the mere existence of a phoneless iPhone makes the original iPhone much less attractive to customers, and that this effect is big enough to offset the extra revenue Apple could get by charging an even bigger premium for the phoneless version.

Why might this be? Maybe Apple thinks the iPhone will look less attractive if the value of the contract lock-in (and hence the cost of lock-in to the customer) is made obvious. Or maybe Apple wants to differentiate the iPhone from other phone handsets by making it the only handset that isn’t obviously subsidized by a carrier. Or maybe Apple is keeping a space in its product line open for a future product introduction. Apple and Steve Jobs are clever enough about these things that there must be some good reason.

Comments

  1. They make much more money binding people up with ridiculous 2000 dollar 2-year EDGE contracts.

  2. Anonymous says:

    You skipped the most obvious answer: no carrier would agree to bend over backwards to provide for visual voicemail and iTunes activation unless they got lock-in in return. No cellphone manufacturer has ever had the power Apple got from AT&T here, and it’s unsurprising that Apple (and, by proxy, its customers) had to make sacrifices.

  3. More likely: AT&T simply said “no”. Apple would no doubt prefer to follow the consumer demand and sell a unlocked phone or a non-phone iPhone.

    But AT&T gets nothing out of that scenario, and at this point Apple is still beholden to the carriers. (This could change rapidly though, as it has with Apple’s relationship with record labels – at some point I expect Verizon to come begging for the iPhone, and offering up the cash to end that 5 year contract between AT&T and Apple prematurely.

    On the other hand, I do expect to see some of these features make their way into the next generation iPod – widescreen with a multitouch interface, coverflow, the photo browser, etc.

    Wi-fi + safari would be sweet – but I doubt we’ll see that. Kind of a shame, because I too would go for something like that.

  4. I think there is another option. Apple doesn’t want AT&T to feel like it is being hosed. Apple has been, duplicitous with partners in the past (Motorola more than once, IBM, et all), by using them, and they probably want their longterm relationship with AT&T to start out well. Selling an iPhone without the phone would leave AT&T out of the revenue sharing.

    In addition, Apple probably doesn’t want to cannibalize iPod sales with an inferior device, because the iPhone is bigger than a normal iPod, but the diskspace is like a Nano. Kind of the worst of both worlds. They probably know they can do better, and they will–I’ll bet Apple is readying a new iPod (not Nano) like the iPhone (without bluetooth, but probably with wifi). This way they don’t replace iPods with a device that could be beat out in the market.

  5. I’m more than a little baffled that you’re so taken with the idea of an $800 iPhone, without the phone part. You say:

    “The first is that the market for a phoneless iPhone is too small, at the price point that they would have to offer. If hardly anyone would buy the device at $800, then it might not be worth the trouble to create another option in the product line. This seems unlikely.”

    Really? That seems -quite likely- to me. I don’t think your own desires in this case are at all representative of the greater population. Maybe I’m not representative either, but at $800, or more, I could just about buy a MacBook. That’d have a keyboard, and the potential for dialup, and more.

    Forget the iPhone exists for a minute. Do you think an $800 tiny touchscreen internet device/iPod with no physical keyboard would be a massive flop? Because I sure do.

  6. I’m told that the activation fee for an iPhone contract is $36, and the cancellation fee is $175. The phone will keep working after you cancel. So in fact you can get a phoneless 8GB iPhone for $811 if you don’t mind giving your info to AT&T.

    What’s more, if you cancel early enough you can get out of paying those fees and end up with just the $600 for the phone itself. See http://alexking.org/blog/2007/07/02/iphone-without-service

    Anyone who really wants an iPhone without the part that lets you actually talk to people can get one easily enough.

  7. I can’t understand from the way you write this whether you’re talking about an unlocked iphone — which would be nice but has serious problems with carriers — or something like an iphone that doesn’t actually have a cellular phone, which would be just stupid at $800. (It would essentially be a gussied-up low-res n800 for twice the price, which is rather more of a premium than Apple has been able to demand lately.)

    My sense (which could well be wrong) is that Apple needed a single carrier to work with for the EDGE network capacity, the video voicemail (or whatever it is) and all of the other whizzy little extras. The carrier would demand exclusivity, but initially at least that would be a good deal for Apple as well, because it means all the phone’s features more or less work. And the ones that don’t can be debugged in a reasonably-controlled environment. Once those features are well understood, other carriers can make sure (if they want) that their networks will play well with iphones, and unlocking becomes a better proposition.

  8. People say that an 800 dollar multi-touch “pocket computer” wouldn’t sell well, but look at how the UMPC market is growing — SOMEONE is buying those things. Woot had a Samsung Q1 up for $650 refurb and sold it out in like an hour during today’s Woot-Off. I’m not one of those people who can go around shelling out 800 bucks for a luxury gadget like that (my $130 Nokia 770 is more along the lines of my budget), but there are clearly plenty of people who can afford it.

    If people are willing to pay $650 for a non-multi-touch device that’s bulkier and doesn’t have the slick interface, and suckers (OK, fashionistas?) are generally willing to pay a 50% or more “Apple premium”, an 800 dollar iUMPC would sell like frickin’ hotcakes. Add Skype or similar (which will probably happen any day now) and you get your phone functionality back, as long as you happen to live in a major city that’s soaked in wifi. Like I said, *I* wouldn’t pay it, but the market is definitely there.

  9. Perhaps there are other advantages for Apple : this is just speculation but if you buy something in the Apple shop I assume you could just pay cash and go and Apple have no means to track usage behaviour etc.
    If you have to sign up with AT&T you hand over a lot more pesonal info’ and can be linked tothe device for ever (even if you cancel the AT&T subscription).
    Or pehaps I’m just paranoid ?

  10. Notice how the pricing plan requires you to purchase the data plan? My theory is that Apple is going for a singular experience, i.e., every iPhone user should have the same experience. Apple also wants every customer to be an evangelist, whether explicitly or just by virtue of using the thing when others are around. As an analogy, Steve Jobs’ introduction of Mac OS X 10.5 featured the gag where he made fun of the various Windows Vista versions, while there will be only one version of OS X 10.5 (not counting the Server variant, of course…).

    The hacker crowd is still reverse-engineering the iPhone, so it’s a bit early to see how aggressive Apple will be about maintaining it as a closed platform. This will be particularly interesting to watch when somebody gets the iPhone running Skype or some other VoIP client over EDGE and/or WiFi. That’s when things will get interesting.

  11. James:

    The Q1 has half again as fast a processor, 4x the screen resolution, 4x the RAM and 5x the nonvolatile storage. And a software architecture than anyone can play with. The N800 and 770 have the same RAM, twice the screen, about half the CPU, and cost about $100 to upgrade to the same nonvolatile storage.

    So you’re talking about something more like a 100% premium for the Apple logo and the multitouch screen. In a market that really isn’t huge yet. The nice thing about doing it as a phone is that hundreds of millions of people already know they want them.

  12. Me thinks you have just defined the new iPod.

  13. Yeah, I agree with the comments above. A phoneless phone would violate the law of the excluded middleman, namley AT&T.

    AT&T wanted ‘THE’ iPhone, not one of ‘A’ variety of iPhones (or iPhone like devices).

    Corporations like to have exclusivity of desirable products with a lopsided contract that most people don’t even notice because they want the product so much.

  14. Justin Hertog says:

    Has anyone tried to use a “phoneless” iphone with a VOIP plan? How has it worked? It’s an interesting alternative that’s possibly free.

  15. What we see now is iPhone 1.0. This product, complete with the service bundle, is what Apple had to offer to get into the market. Right now, Apple has little market power — observe how non-costly it has been for Verizon to say “no” to the iPhone.

    But Apple has faith in the iPhone and its ability to gain fans and sell widely. In a year, Apple will introduce iPhone 2.0. Will Verizon still be easily able to say “no” then?

    And what of iPhone 3.0? Then Apple will have substantial market power, and can sell the iPhone directly to consumers, just as they sell everything else. And consumers can pick what carrier they want to go with their new phone, just as consumers do in every other country. Heck, by the time we get to iPhone 3.0, many large urban areas will have pervasive WiFi. Then who needs cell service?

    So, no, Apple’s not skipping direct to iPhone 3.0. To really offer what you want them to offer, they need to have market power. Apple won’t sacrifice the power it can have now — the concessions it can get from AT&T by offering an exclusive, including vital things like the GUI voicemail — to sell a few marginal units. From a business point of view, it just makes no sense, especially if Apple expects the iPhone to become to phones as the iPod is to music.

    All in good time.

  16. Hi,

    Pardon my ignorance of iPhone. It is a mobile or cellular phone, right? So why can’t this operate with any other provider provided that meet the standard. You can go to buy a Nokia, Samsung, LG or Motorola phone, go to some provider’s shop front and sign up. Of course if you buy a pre-paid from Verizon, they impose this lock in policy on it. But there are people everywhere to unlock it for a small fee.

    This is particularly true in GSM world where provider lock in is almost unheard of.

    Does iPhone has some special firmware to prevent this?

    Someone mentioned about Wi-Fi, Safari Browser and watching movie. What is the big deal with iPhone as my mate sitting next to me has been using a Pocket PC with all those features for more than 1 year before iPhone is released. The next model even have GPS, which is not available in iPhone. He has no lock in and none of this restrictive business practice only Apple seems to be allowed to impose.

    Looks at O2 and all these which are far cheaper. OK it does not have iTune then again they can all play DRM free MP3/4 and MDA.

    The price of an iPhone with the larger capacity can almost buy Origami grade ultra mobile PC that you can run any software available, use any browser, including the beta version of Safari.

    Can iPhone run Firefox? Or use Thunderbird?

  17. graphex says:

    Bob, I’m guessing that you are not writing from the US, where nearly all phones are locked to one carrier. We have a badly corporate-run system here where the phone companies do everything they can to – contractually and technically – lock you to them.

    In the case of GSM (unlike any other US cel ‘standard’) it is sometimes possible to switch SIM cards in a phone if you are, say, switching from t-mobile to AT&T. However, if you had a “Sprint RAZR” and wanted to switch to Verizon, you’d have to get a “Verizon RAZR” and throw out your “Sprint RAZR”. The “consumer benefit” to the way things are done here is that, for only a 2 year contractual commitment, you’ll essentially get all your phones for “free”.

    That is, I think, the main paradigm shift here. Americans are completely surprised that they actually have to ‘buy’ a phone rather than get their carrier’s subsidized version of the popular new Motorola. While a few US consumers have actually upgraded their phones to a ‘smartphone’ of some type and paid the full cost of the hardware, that has traditionally been extremely rare, and I doubt anyone ever expected to use their new purchase on a different carrier than the one they purchased it for. The vast majority of Americans just pick up what ever their phone ration is from their selected carrier and use that (typically while driving).

    I do believe that the US version of the iPhone does lock you in to a special SIM card, and you can’t just swap it out with a t-mobile SIM card and try to use that. From what I understand of laws elsewhere, it isn’t legal to prevent SIM card swapping, so that is one reason that everyone is watching closely to see what Apple releases in other markets. If they release a phone for the UK, I believe the laws are such that it must be able to work on any GSM carrier – relying entirely on contractual agreements to lock you in to one verses another.

    As far as iPhone versus Pocket PC, the general consensus is that the interface trumps the set of features, and having used many different types of smartphones, I’d certainly agree with that. Being able to do 5 things very well is better than being able to do 7 things ‘pretty good’ (if you’d even complement the PocketPC interface with ‘pretty good’).

    I have a SymbianOS phone that does a number of things that my iPhone can’t, but it just didn’t do anything as well as the iPhone does. I understand how features are much more quantifiable than usability, but in my mind, usability easily trumps competing feature sets for this case. I won’t bore you with sports car analogies – I’ll leave that up to someone who is better at writing satire so they can make it interesting.

  18. I would guess that because “phone” is so obvious in the name iPhone, that they wanted to make sure that all of them were phones so as not to make the name meaningless.

  19. lovethetelcos says:

    Forget about Verizon and Sprint. Verizon and AT&T will merge. Sprint will be assimilated. Competition? What competition? That is the question!
    And I think the answer is WiFi. In a world with an increasing number of WiFi devices, all technically able to transport packages, the thread to the old telcos is quite serious. With a new mesh based on a few wired backbones and plenty of WiFi devices at homes and elsewhere, who needs a telco? Who will still want to pay the middleman? It may be still a bit early. Check your neighborhood. Chances are you find a WiFi device (a hub would be a plus, but not really needed).

    I think there is a good reason why AT&T invests into WiFi meshs. The iphone helps them to put their foot into the development with a potentially market dominating device. And AT&T is back in the game. We lose.

    http://gigaom.com/2006/07/20/metrofi-teams-with-att-for-muni-wifi/

  20. I think Maddox put it best: http://www.thebestpageintheuniverse.net/c.cgi?u=iphone

    It’s all hype and nothing more. If it has an Apple logo and an “i” in its name, people snatch it up like hotcakes.

  21. who cares dvdjon can get you one… http://nanocr.eu/2007/07/03/iphone-without-att/

  22. There has been a Iphone unlocker that surfaced. So you can use it as an iPod and pda… see:

    http://www.keznews.com