In Fantasyland, The iPhone Slices, Dices and Comes With Free Service

from the take-your-booyah-somewhere-else dept

Thu, Jan 25th 2007 2:07pm — Carlo Longino

The launch of the iPhone did little to dispel the speculation surrounding the device, as Steve Jobs left enough unanswered questions to keep rumors swirling for a while. Most of them have been fairly harmless, but a recent one stands out, as "celebrity" stock-picker Jim Cramer says Cingular/AT&T will give iPhone buyers 18 months of free service in order to win subscribers over from Verizon Wireless. As Barron's Eric Savitz points out, it's a ridiculous claim, not to mention one AT&T apparently never made. Cramer's claim simply makes no sense whatsoever: Cingular is paying Apple, in some form, for the right to have an exclusive deal on the iPhone, in the hopes that it will recover the subsidy by selling service to iPhone users. So why would Cingular subsidize the iPhone itself, then lock customers into a two-year contract, only to provide them with free service for 18 months? That dramatically increases the subsidy cost, and gives them only 6 months to recover it and turn a profit. Even if Cingular were selling the iPhone at a profit (which it certainly isn't), there's no way that profit would justify 18 months of free phone service. Fanboys letting their imaginations run wild is one thing, but talking heads basing investment "advice" on unfounded speculation is a bit out of order.

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19 Comments

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The Basic Investor, 25 Jan 2007 @ 2:07pm

The IPhone Slices and Dices...
Now we know why Larry Kudlow ditched Jim Cramer as a partner on their talk show.
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Henry Wener, 25 Jan 2007 @ 2:07pm

AT&T everything from them should be free
Mergers and acquisitions do bring back horrors. We had 4 lines on ATT wireless, about half the time we got no signal, lost calls and extra charges. Can't wait until our 3 cingular lines are up.
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Monterey, 25 Jan 2007 @ 2:48pm

What Service?
OK, what if he's not talking about voice service, but free media-net service? That would make it a much more credible claim.
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Trey, 25 Jan 2007 @ 3:12pm

Media Free "Bee"
I definatly think Cingular is giving new iPhone buyers free Media. Perhaps 2 years is a bit much though. This new iPhone will be a media and connection powerhouse, fuel the fire and show people what they "need" by giving free internet.
2 Years free "service" is insane, not only impossible for Cingular/ AT&T to give away.
Media sounds a bit more like it.
And, although im not 100% sure, 6 months sounds decent.
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Anonymous Coward, 25 Jan 2007 @ 3:19pm

no, it wouldn't make it a more credible claim, since as the third link says, AT&T never said anything of the sort in their conference call, despite what Cramer says.
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oshout, 25 Jan 2007 @ 3:45pm

The sources I read are telling me that the iphone is making atleast a 50% profit on each unit.

Since you're so sure that the iphone is costing apple/cingular money, and since most sites disprove this, it throws the continuity of your 'story' into question.

So, not only did I waste time reading a 'story' that was obviously made to get people to read it, without second thought to journalistic integrity, but I've also wasted time writing this comment!
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Mike (profile), 25 Jan 2007 @ 3:56pm

Re:
The sources I read are telling me that the iphone is making atleast a 50% profit on each unit.

You mean *Apple* is making at least 50% profit on each phone (and some others have questioned that report, so I wouldn't take it as gospel).

Since you're so sure that the iphone is costing apple/cingular money, and since most sites disprove this, it throws the continuity of your 'story' into question

You conveniently mix Cingular & Apple here, which is a mistake. Apple is making a profit on the phones. Cingular is not making a profit on the phones. The difference is an important one.
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Cleverboy, 25 Jan 2007 @ 3:57pm

Mm, hm.
This is an interesting case-study. Let's face the facts. The iPhone is quite probably the most buzz-tastic electronics device in history. Websites melted after the announcement. Stats were posted with incredulity. Major news outlets and wall street could not seem to talk of anything else. Tech and lifestyle magazines tripped over one another to post pictures, even before the existence of such an offering could be confirmed.

Setting aside merit and practicality... its an interesting phenomena. AT&T would be wise to fan the flames, but admittedly foolish not to cash-in. The question is... short term, or long term? The interesting thing is this... once AT&T gets a certain segment of the business, they will do everything in their power to KEEP that business. If a year and 1/2 of free service (on a 24 month plan) causes legions to jump ship from competitors, this is the time to launch such an incentive. The Cingular website is already gauging interest, and fending off early-enthusiasts attempting to beat the presumable cattle call.

Remember the basic rule that it is less expensive to KEEP a customer than to ATTRACT a new one. They, AT&T/Cingular have just succeeded in releasing a nuclear BOMB of "attraction". With this once in a lifetime opportunity, were AT&T to do this "incentive" (or perhaps something like it)... given other incentives to stay... like free calls to anyone in the network, cross-pollination service incentives dealing with land-lines and cable, etc, etc... it does not seem entirely far fetched, as much as it sounds incredibly disturbing.

Now, I'd heard 1.5 years of "free" service, not 2 years (although the contract was supposed to be for 2 years). On a basic $40 plan, 24 months is $940 over 2 years. 18 months leaves them with a $220 contract, with perhaps a $150-$200 cancellation fee. Even $220 is roughly $10 per month... the discount appearing on every bill as such. This is of course leaving out those who might want a data plan. A potential customer might attempt this attractive deal for 6 months before deciding to upgrade his/her service, thereby extending the contract another 6 months, and upping the monthly fees.

Personally, I think it is a trifle foolish for anyone not to consider this rumor at least mildly plausible. If anyone remembers the "pay-outs" many customers were receiving simply to "switch" long-distance carriers, back and forth for consecutive months... (for cash payments of hundreds of dollars), you can only begin to recognize what these companies should recognize. This is a HIGH-STAKES numbers game.

We've yet to truly understand the full nature of the deal Apple made with Cingular, and probably won't for a number of years.

While Microsoft plays catch-up with the Zune, Apple has created a customer-capture and retention system in the iPod/iTunes brand, that is the envy of many industries who continue to launch products that claim to be the "iTunes of..." INSERT SERVICE NAME HERE. Apple has apparently pledged to "keep out the bad guys" with regards to those that would "unlock" the iPhone, enabling people to go to other services. My money is on the notion that Jobs would feel more confident with Cingular boasting such measures, if he had an incling of other fronts of positive persuasion as well.

I still think plans for a "perfect storm" are in the works. As basic as this first offering is, it seems clear that this game of Texas Hold 'em isn't going to finish on the first round.
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Snack, 25 Jan 2007 @ 3:58pm

Re:
He didn't say Apple wasn't making money - he said Cingular wasn't making money. There is a big difference.
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Carlo, 25 Jan 2007 @ 4:10pm

Re:
Here's a transcript of the AT&T call where Cramer claims AT&T said they'd give free service. If somebody could point out exactly where an AT&T exec said that, it would be most helpful, because it certainly looks like they said nothing of the sort, regardless of what Cramer thinks he heard.
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Solo, 25 Jan 2007 @ 4:26pm

Are you sure ATT did not mean something like this:

"I want you to sign up for 2 years, but seeing that you are really eager to set your grubby hands on this shiny new iPhone, I'm going to require tat you pay 18 month in advance."

Now that makes a lot more sense.
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Cleverboy, 25 Jan 2007 @ 7:12pm

Re: Re:
If you had links to the digital audio as well as a copy of their presentation, I'd be much more convinced they said nothing. You're probably right though. Cramer certainly admitted it to be generally speculation. Worth nothing that any form of early announcement serves as an obstacle to current purchasing patterns.
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Carlo, 25 Jan 2007 @ 9:14pm

Re: Re: Re:
Here's the analyst call and presentation.
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Sanguine Dream, 26 Jan 2007 @ 5:40am

Ummm...

Jim Cramer says Cingular/AT&T will give iPhone buyers 18 months of free service in order to win subscribers over from Verizon Wireless

Didn't Cingular/AT&T get the exclusive deal with Apple's iPhone in order to do just that?
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another, 26 Jan 2007 @ 6:29am

Jim Cramer is a pretty smart guy. He made a ton of money during the dot com days, hey made a lot of money during the bust. Forget about his personna on the air, he is a serious money man. I wouldn't put it past him to have some knowledge of future plans that others are unaware of.

The media is the hype machine, Wall Street tries to cut through the hype. Of course, media hype can affect the markets and how consumers act, so of course they take that into account. If you want a sense of where the market is going, look to wall street, because they are the ones who put their money where their mouth is.
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Anonymous Coward, 26 Jan 2007 @ 6:46am

None of this matters...
I can't get Cingular in my area so until other carriers move into my area (US Cellular has a convinient lock on the area) or start carrying the iPhone none of this of consequence to me.
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Brad, 26 Jan 2007 @ 10:12am

iTarded
This whole thing is idiotic, and I've thought so since I first heard it. Think about it this way:

The average "fully on" account for the iPhone is predicted to be ~$100/mo, between data, picture share, video share, and minutes.

So people actually believed that they'd get an $1800 discount on a $600 phone, in order to get you to switch from another provider?

You people (believers) are as hopelessly dumb as Steve thinks you are, and that's a damn shame.
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Andy, 26 Jan 2007 @ 1:59pm

But if AT&T are not...
.... subsidizing the phone, which might be the case since I read it would be available in Apple stores to, then wouldn't they need to cut their service charges. They can't reasonably expect to have people drop $500 on a phone which is not subsidized, enter a 2 year service agreement and still pay the same for service as people with heavily subsidized phones are paying.
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Cleverboy, 27 Jan 2007 @ 3:37pm

Re: But if AT&T are not...
> They can't reasonably expect to have people
> drop $500 on a phone which is not subsidized

Apple thinks this new "iPod" is a premium device compared to its other iPods. True, it only holds as much as a nano, or for more, twice that, but running MacOSX and being fullscreen, etc, etc... they're thinking "cha-ching". Far be it from us to suggest Apple allow the minds of the public to be bent by discounting the cost presented to the consumer, especially when they prepare the 6G iPod-only device for the market. I think they have every right to expect people to pay that much for a combination device like this.

--And people will do it too. Will Cingular discount its service plan? They certainly have the room, don't they? I'm sure Apple will even sweeten the wholesale cost to them through their retail chains. Seems the Cingular reps denying the story, "deny" the story by confirming the requirement of a rate plan. LOL. Anyway... much like Apple defends its iPod brand by not allowing it to be subsidized, I'm sure Cingular won't allow any "discount" to be characterized as "giving away" anything either. I'm sure Cingular will count on these rumors being dead 6 mo. from now, so it can spin characterization of its rate plans freely.

> Here's the analyst call and presentation.
Thanks, Carlo.
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