iPhone 3G: Price cut or price increase?

One of the more hotly debated aspects of the upcoming iPhone 3G is whether the new pricing model represents a price cut or a price increase. This seems like a silly question on the surface given the fact that most iPhones a year ago sold for $600, while a month from now the typical iPhone asking price will be about $200. But as is always the case, things aren't quite that simple.

Part of the problem is that AT&T is raising the cost of the iPhone's monthly plan.

As I spell out in Part 1 of my original iPhone review, the real cost of the iPhone (as with any smart phone or cell phone) includes the total cost of owning the device over a two-year contract (at least in the US). And AT&T has never offered particularly compelling iPhone service packages: I'm currently using the very cheapest package and my monthly bill is just a hair under $70. That works out to $39.99 for the "rate plan" (phone calls), $20 for data and then whatever associated fees and taxes, according to the latest bill. And that's the cheapest bill AT&T offers at this time. Do the math, and the total cost of my iPhone over two years is $2280. (The device was $600 new. And you can't count the $100 store credit Apple offered as money off the iPhone price. I hope that's obvious.)

So what about the iPhone 3G?

If nothing else changes, the new iPhone will be less expensive ... compared to what me and anyone else who bought on day one will pay. The 8 GB iPhone 3G is $199. But AT&T is raising the iPhone data plan by $10 a month to $30. That means the total minimum cost of the iPhone 3G over two years will $200 + ($80 x 24 = 1920), or $2120, a savings of $160. Opting for the most expensive iPhone (the 16 GB model, for $299), still saves $60.

Except for one thing: The price of the iPhone currently is not the same as the price I paid a year ago. Since then, Apple slashed the price of the original device from $600 to $400 (and later added a 16 GB model for $500). Do the math, and you find that compared to the current-gen iPhone, the iPhone 3G 8 GB is $40 more expensive ($2120 vs. $2080), as is the 16 GB model is ($2120 vs. $2180), over the minimum two-year contract.

Put simply … the iPhone 3G actually is a bit more expensive than the current devices. A bit. But given the lower up-front cost—which is huge for most consumers—and the additional functionality, this is really kind of a wash, isn't it? What's $40, real world, over two years?

I had also heard (a rumor?) that AT&T was going to introduce a lower-end "rate plan" for people (like me) who don't make a lot of calls. That may or may not be the case, and I'm looking into that now. Let me know if you've seen anything about this, please.