The iPhone Upgrade Plan: A Fair Solution to a Growing Apple Problem | iLounge Article


The iPhone Upgrade Plan: A Fair Solution to a Growing Apple Problem

Apple’s product updating philosophy—explained in a still-useful 2006 iLounge article called Ten Rules for Buying Apple Products—is notoriously bold: the company routinely and unapologetically improves its computers every four or six months, and its iPods every year or so, often adding major new features to excite new customers and win additional business from past ones. As we said back then:

“The purchase of any Apple product can be made on a single question: does the product available today have the features that will satisfy me? If the answer is yes, buy it and enjoy it. If the answer is no, wait. But don’t second-guess your decision or wait around for a replacement that may take years to arrive. If you buy soon after release, you’ll have the longest opportunity to enjoy the features and performance before something else comes along and makes you envious.”

Though the 2007 iPhone followed our prior guidance to a T, with updated models announced and released every 11-12 months, two new, related factors have changed the equation: the cellular service contract and subsidized pricing. In the United States and some other countries, this contract lasts for two years, locking an iPhone customer into a device that may be a generation or two behind the company’s latest release, depending on when the first iPhone was purchased. For instance, those who supported the original iPhone right before its discontinuation, and those who bought the iPhone 3G on day one, still have a year remaining on their service contracts. Additionally, the marketed “$199” and “$299” costs of recent iPhones actually turn out to be their provider-subsidized prices for customers who aren’t already locked into contracts, an obscured point that has confused and angered readers since the release of the iPhone 3G last year.

What this practically means for some prior iPhone users is an apparent “penalty” of $200 to $400 on top of whatever Apple’s announced prices may be for the latest iPhones. Thus, even if the iPhone 3GS will be sold to qualified new AT&T customers for $199 or $299, it will be available to some current customers for $399-$499, and others for $599-$699, depending on the remaining lengths of their service contracts. AT&T deems customers in the latter two camps to be “early upgraders,” and tops off the $200 to $400 hardware fees with two additional $18 charges: one to “activate” the new phone, and another as an additional “early upgrade” fee. All of these costs are in addition to a commitment to pay AT&T a minimum of $1,680 in total service fees over a new two-year contract, or a significant early termination fee.

Two points must be acknowledged at this stage: first, no matter how appealing a newly upgraded iPhone model may be, it is not the consumer’s right to have one at a low price. Apple’s and AT&T’s initial $199 and $299 prices are there to lock customers into new contracts, which is the reason that a more capable iPhone now sells for a lower price than an otherwise similar iPod touch. There was never a point in the past when a brand new top-of-line iPod or Mac could be had on the cheap from day one, and the iPhone isn’t deviating from Apple’s past pricing strategy.

But on the flip side, by failing to offer consumers an easy path to upgrade to its latest iPhone models, Apple is creating a perverse incentive: its biggest fans are learning that they may be better off skipping minor iPhone upgrades altogether than standing in line to be first, then having to re-sign contracts and cough up hundreds of dollars just to add a few new features to their prior models. Some have correctly observed that iPod touch updates will follow a few months after new iPhones, adding similar new features—sometimes even better ones, such as Nike+ and faster processing—without the hassles or costs associated with cellular service contracts.

It should be noted that Apple has previously been able to minimize product update problems despite its aggressive updating cycles. In addition to offering limited return privileges, it has generally kept prices stable enough that serious fans have been able to resell their recent Macs or iPods at relatively small losses, or offer hand-me-downs to family or friends when tempting new upgrades are offered. Yet with the iPhone, which is most commonly sold locked to a carrier and linked to a contract, resale and gifting are far more difficult. Carriers attempt to impose fees and restrictions with every upgrade. Due to higher eBay and other fair market prices for unlocked phones, owners are financially incentivized to seek out unsanctioned tools to unlock their iPhones before selling them to strangers online.

This state of affairs creates problems for everyone—customers, service providers, and Apple alike; consequently, complaints about Apple and AT&T have become so common after new iPhone hardware announcements that they threaten to drown out the significance of whatever new features have been added. A simple, fair solution would help everyone have a lot more fun and excitement. So we’re going to propose one today.

Rather than significantly penalizing loyal customers for wanting to buy Apple’s latest and greatest innovations every year, Apple should require service providers to offer an iPhone Upgrade Plan, consisting of the following no-nonsense services:

* A single, fair Upgrade Plan price with no additional charges, rather than separate hardware subsidy offset, new activation, and early upgrade fees. In the United States, a set price of $150 in addition to the marketed cost of the new iPhone would be reasonable for customers with 1 year or less remaining on their contracts; a set price of $250 would be reasonable for customers with more than one year remaining.

* Transfer of the user’s account from one iPhone model to the next without loss of any accrued contract privileges, such as rollover minutes or length of “good customer” status. In exchange, the user will agree to a contract extension with the provider.

* If requested, free transfer of the prior iPhone handset to the account of another customer without mandating an additional service contract for the second customer. As no subsidy is being offered, this customer will have the right to upgrade to a later iPhone model at off-contract pricing.

* Alternately if requested, recycling of the prior iPhone handset or - in cases where the model has not been discontinued and the provider wants to be able to offer it as refurbished - a fair trade-in value for the used device. This trade-in value could be applied towards the purchase price of the new iPhone.

* Users must be informed of their upgrade options at the time of initial purchase and reminded of them upon the release of the new device.

By offering such an iPhone Upgrade Plan, Apple and its service providers would make substantial strides in winning back the hearts of their past customers, many of whom feel as if they’re stuck being observers to the latest iPhone innovations rather than participating in them as happy users. An acknowledgement of these user concerns, realistic upgrade paths, and resale needs would only help to make the iPhone community larger and happier as Apple’s devices continue to evolve for years to come.

Readers, what are your thoughts? Would an iPhone Upgrade Plan like this one strike a fair compromise between your needs and those of Apple and its service providers? Or would the prices and terms need to be changed to satisfy you? We’ll be looking for your comments below.

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You are addressing this problem from the wrong side. We don’t need any update plans, we just need unsubsidized and unlocked devices directly from Apple. People willing to buy into the locked subsidized device should do it - and all others should have the choice to buy a free device (like available in several countries, where Apple is forced by the law to sell unlocked devices) and subsidize it themselves at will.

Unlocked devices are simply sellable via ebay once the new generation appears and then simply by another unlocked device.

Free the iPhone!

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 12:22 PM (CDT)


Oh - and of course Apple should automatically unlock all locked/subsidized devices after 2 years, which adds them to the AppStore ecosystem again.

Even for people not willing to fork out the money for overpriced AT&T;contracts.

After all it should be our damn right to get the phone unlocked after 2 years. We damn paid it during those two years. AT&T;has no whatsoever right to “tax the next user again” in a new contract - the user gets no subsidy.

Hasn’t anyone sued AT&T;/Apple yet?

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 12:26 PM (CDT)


I like the upgrade plan.  I might grumble a bit more about the $150 upgrade fee ($75 would be more reasonable, IMHO) but if I knew it was coming, I’d be happier than seeing the prices during the keynote and then finding out later that they don’t apply to me.  When I was all ready with my credit card even before the keynote started and I’m thinking I might skip it now.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 12:42 PM (CDT)


I’d like to see a trade in plan with the used equipment going to schools or non-profits and with an IRS approved tax form provided at trade in. That way, the early adopter doesn’t lose all the value of the original equipment.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 12:57 PM (CDT)


It’s very simple, just add 2 years to the remaining time on the customers contract.  If they still have 18 months of a 24 month contract remaining, and upgrade to a new phone, then extend their contract 24 months, to 42 months, AT&T;still gets all of their subsidy monry back, as well as increased revenue when the users old phone is recycled to a friend or family member.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 1:12 PM (CDT)


“It’s very simple, just add 2 years to the remaining time on the customers contract.”

This only accomplishes the goal of protecting the subsidy if, in addition to the contract extension, the termination fee is also increased. After all, this fee is designed to recoup lost subsidy due to early termination. Indeed, some companies are prorating the fee now as the contract term is used up. Conversely, if the contract is extended early, the termination fee for the next two years of contract would need to be added on.

The net result would be an accumulated debt to the subscriber as they repeated this cycle with each year’s new phone releases. After 1 year, they have 3 years worth of contract and fees. After 2 years, they have 4 years worth, and so on.

Rather than dealing with upgrade plans or contract extensions, why not simply go back to the 1 year contract period that used to be common in the past, even if it means a slightly reduced subsidy?

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 1:39 PM (CDT)


David I agree, I forgot to add the termination fee increase, it was in my original plan. Bottom line, you pay to play.

You do realize, you can walk into an AT&T;store, buy the iPhone or any phone for that matter at full price, and walk out with no contract term, basically month to month service.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 1:46 PM (CDT)


oh, the weeping, wailing, and whining! i want a new phone every year! i want a new pony every Christmas! charging $200 extra is for my spoiled impatience is an outrage!! it’s all about me!!!

a two year purchase financing cycle for cellphones is eminently reasonable. absolutely no consumer “needs” a new phone every year. gadget lovers may want it, but that is not a moral issue. that’s for their emotional gratification.

and in fact, the extra AT&T;charge applies only for 18 months, not even the full two contract years, so this is boils down to “i shouldn’t have to wait even 6 months.”

iWhiners, please get over yourselves.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 2:03 PM (CDT)


I think Jeremy’s article hits the nail on the head perfectly. What isn’t available is a clear path for people who always want to upgrade to the latest iPhone. I also like Steve’s suggestion of simply augmenting one’s contract to add another 24 months onto the existing terms if a customer chooses to upgrade.

The upgrade plan presented by Jeremy takes into account the way cell phone equipment and service is sold in the United States. So given the constraints of the American system, this upgrade plan makes the most sense for all parties.

I’m the last person to defend AT&T;or any U.S. provider for that matter, but the deal these companies make with customers is that they get cheap or free cell phone in exchange for contract service. That’s the only way a company can make back the subsidy that allows for the free or inexpensive phone. (The pricing and fairness of the contracts is an altogether different debate.)

My personal preference would be a more European model where a user purchases an unlocked iPhone and chooses the provider best suited to his or her needs.

But until that day happens, iPhone users (of which I currently am not for various reasons) need an easy, transparent path for upgrading their hardware.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 2:18 PM (CDT)


Honestly, AT&T;should attempt a bit of a trade-in plan. If the phone is acceptable, then there is no premium to upgrade, you pay the $199 / $299. AT&T;would have a used phone to sell as a refurb, which would go for $99 / $150 (8 and 16 GB, respectively). So it would be similar in cost to them for “early upgraders”. Then they would also score new iPhone users that can afford $99 / $150, but not $200+. I dunno, just my thoughts.

I bought my 3G last year, and am in the process of selling it to gear up for the 32GB. I can wait (Apple’s site tells me I am eligible as of 7/22/09). It’s obvious that AT&T;and Apple are taking advantage of their most loyal customers by forcing them to either wait (typically up to 6 months) or pay a $200 or more premium. Shame on them, they have/had a good thing going with these fanboys, but might not now.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 2:45 PM (CDT)


Maybe an easier way of doing this would be to ask those who want to upgrade before they are eligible to pay the current termination fee.  This way AT&T;recovers their subsidy, but it is pro-rated based on how long they have left in their contract (which is exactly what the ETF is for.)  The big thing here is that the user wouldn’t have to actually cancel their account, wait 90 days and get a new phone number the way that I’ve seen some people suggest in order to avoid paying as much; however, they DO have to sign up for the new 2-year contract.  AT&T;simply needs to be a bit more flexible regarding the cancellation procedures.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 3:09 PM (CDT)


I’m sorry, but this whole upgrade controversy is such a load of you know what.  A 16 gig iPod Touch is $299.  A 16 gig iPhone (upgrade price) is $599 (actually $877 un-subsidized).  If you look around, G1 Android phones are selling for $400-$500.  Nokia N97’s are $799. HTC Touch Pro - $500-$600.  Get over it people. You’re buying a handheld computer that makes and receives calls, not a phone.  If you’ve got an existing, signed, 2-yr. contract, AT&T;or any phone company has the right to earn that subsidy back.  It might be a bummer to your wallet, but it’s not ‘unfair’. You made the agreement, now live with your decision.

that said, the idea of being able to trade in your own unit for a reasonable value, is also a fair idea.  It works well with cars, why shouldn’t it work with phones.  But keep in mind, the phone company still has to make money on re-selling the unit as a refurbished unit.  They’re selling 16 gig. refurbs for $129.  They’ve got to clean them up and clean them out and make sure they are running correctly, all of which costs $, so getting $100 back for a used unit might not be realistic…

And one last thing - with your old phone, your getting a whole spanking new operating system for free, one that offers a ton more features and essentially makes your phone new again.

So let’s get real people.  Just like you need to make $, so do these companies.  You may want the new toy, but you’re not entitled to it, and you knew what you were getting into when you signed the contract.  If you didn’t than that’s an even bigger strike against you.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 3:23 PM (CDT)


I think the biggest complaint I have is that if I upgrade on this particular day, it’s going to run me $200 extra, and yet if I go into the same store the next day I’ll be “qualified” for the subsidy. The hard-and-fast cutoff date is what causes the uproar, quite frankly, and with good reason.

The subsidy should be prorated, in the interest of fairness. Trade-in bonuses should be extended. Some of you have referred to the complaining as “whining” and deemed it some sort of misplaced sense of entitlement from iPhone owners, but that’s not even close to being true. The simple truth is that people are awfully sick of the mobile telephone industry jerking us around and tacking on fees left and right. I mean, the $200 subsidy can be argued rationally on both sides, but another $18 “early upgrade” fee? And an $18 “activation” fee for a phone that merely requires me to move a SIM card from one device to the next? Please.

Trust me, this complaining isn’t occurring in a vacuum. It’s not just a function of wanting the latest and greatest iPhone and being asked to pay extra for it, but the fact that AT&T;has done precious little over the past 24 months to ensure that iPhone owners are not only happy with the equipment, but with the professionalism of the provider as well.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 4:13 PM (CDT)


Couldn’t AT&T;just try a contract plan where you pay the subsidized price upfront but then pay the rest off in payments spread out over the length of the contract? So you’d just have an extra $10 or so added to each bill. I’m sure it would make for more people getting the phone who couldn’t afford the large upfront cost and they would probably make even a little more money by charging some interest.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 4:13 PM (CDT)


Actually I think the system as is, is fair. YOU HAVE NO RIGHT to have ATT front you money again until you have fulfilled your commitment. Having said that, I feel the $18. fee to activate is gouging IF you already have an iPhone. I feel that should be only charged the first time.

I lease my Audi and if I want next years model before I fulfill my three year lease, I actually don’t believe that there should be no financial penalty for me.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 4:45 PM (CDT)



I don’t know how feasible this is given the entrenched thinking of service providers… but some logic and certainty here is a must to lure the more methodical buyer (not exactly a key demographic/market segment) but more importantly to appease the CRUCIAL early adopter/fanboy. Indeed they are not only an absolutely essential group for Apple’s continued success (and great marketers buzzmakers) but they are exactly the types worst hit by this particular update as their iPhones like my own are almost certainly bogged down by apps to the point of severe frustration.

Make this happen, Apple. I know it might take a while to force service providers into action, but start that process now. If you can make this happen the market is yours… for keeps.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 5:37 PM (CDT)


It seems to me that the real problem is the ridiculous length of the service contract. 24 months is way to long for cell phones which, in general, are “not new” after six months, “old” after a year and “obsolete” after two years.

But shortening the plans to 12 months, or ideally 6 months creates a problem for Apple and AT&T;.

Apple needs to sell the product at a price that seems fair to the consumer. With 6 months contracts it would mean an overly expensive contract with services that’s not needed.

From the AT&T;point of view they would want customers to have a reasonable contract where they’d pay for what they get.

These two are incompatible, and as such they have the choice of selling the iPhone at a high price or chaining the customer to an unwanted and unneeded contract.

This problem is actually illustrated quite well, where I’m from, in Denmark. Here the only time where the iPhone is somewhat reasonably priced, the contracts are madly expensive. With the only useful contracts the iPhone however is ridiculously expensive.

But as along as people don’t research how they use there phone they are easy prey for cheap upfront prices and heavy monthly fees.

That’s how the mobile phone industry has worked so far, and I don’t see it changing

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 6:02 PM (CDT)


Just called both ATT and Apple customer service about this “double price” new iPhone, and received NO satisfaction from either company. Each blames the other for the high pricing, and offers NO solution whatsoever for the loyal customers who purchase and promote the new products each time they come out.

Yes, I am definitely a “gadget person” who loves to be on the front line of the newest technology. I have had an iPhone since day-one—but this time, and in this economic climate, I’ll just wait it out and skip the newbie GS3s—maybe until I’m finally eligible in January, or I may just maybe forever…

These same companies did this to us once before, then gave a $100 peace offering rebate as an afterthought when their loyalists complained. Seems like the marketing folks would reward their best/first customers—not penalize them for their faithful use of the product.

Perhaps if a majority of us withhold our purchases, as I intend to do, they might get the picture!

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 6:12 PM (CDT)


I don’t understand the fuss over the pricing. All carriers do the same thing. It happened to me with another provider. If a new model comes out you must wait until you are eligible or pay the price.

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 6:15 PM (CDT)


AT&T;is practically stealing from its best customers.  iPhone afficianados almost 1 year into their contract have already paid half of the subsidy off.  So to charge them an extra $200 is nothing more than a fleecing.  A pro-rated surcharge makes more sense.

AT&T;is nothing more than greedy capitalist scum.  It’s time Obama take them over!

Posted by Jeremy Horwitz in East Amherst, NY, USA on June 10, 2009 at 6:26 PM (CDT)

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