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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