Will Apple Allow AT&T to Discount the iPhone?

Arik Hesseldahl from BusinessWeek in the article , "Why AT&T May Deep-Discount the iPhone."

With less than two months to go before Steve Jobs takes the stage at Apple's Worldwide Developers Conference, where he's expected to unveil a new iPhone, it appears that AT&T may not be convinced that new bells and whistles will be enough to get droves of new customers to switch from other wireless carriers. So after a year of charting a new wireless business model by selling the vaunted iPhone at premium prices, the nation's biggest phone company may resort to the oldest trick in the cellular book: big discounts.

Gruber from Daring Fireball seems to disagree with Hesseldahl's logic.

The problem is this: why would Apple allow AT&T to sell iPhones for half the price of what iPhones cost in Apple’s own stores (including this one)?

Subsidies only work when they’re sold in conjunction with two-year contracts. It’s possible that Apple could do the same, and sell subsidized AT&T-contract iPhones in Apple Stores, but that would mean abandoning the innovative (and very appealing, very successful) model of activating a new iPhone at home, via iTunes, rather than sitting around in a store for 45 minutes making uncomfortable small talk with a salesman while waiting for your credit check and your old phone number to transfer over.

You’d think this might be worth a mention.

From a financial aspect, Apple allowing deep discounting makes a lot of sense. The more wireless-plan contracts that AT&T can pick up, the more profit there is for Apple via revenue sharing. This is on top of the profit Apple makes on the sale of the hardware alone. A good percentage of the iPhones that Apple sells in its stores are bulked shipped around the world to places like Russia, which supposedly has amassed a market of 500,000 unlocked iPhones. These unlocked phones make Apple less money because they lost out on revenue sharing.

But the real problem with the deep discounting process is the customer experience, which is extremely important to Apple. To get a discounted phone, usually you have to sit with a rep in the store or on the phone as they take your credit card and have you sign the contracts, etc. Once the wireless plan is activated, then they charge you the discounted price for the phone and you walk out of the store with your new phone. I agree with Gruber: there's not a snowball's chance in hell Apple will allow this in Apple stores. And there's a bunch of reasons why Apple wants you take your iPhone home and activate it by hooking it up to iTunes. But, is it there a way Apple could maintain its retail customer service experience and still allow the discount?

Here's an idea: there are two seperate approaches for the $200 discount, one for AT&T stores and one for Apple stores.

In AT&T stores, a customer must suffer the pain of sitting in the store through the finance check and contract signing. At the end, customers can walk out of the store able to make phone calls with their $200 iPhone. But what about iTunes? Apple surely wants those users to connect to iTunes and buying all that media right? That's where the iPhone updates and the SDK comes in. People still have to connect it to iTunes if they want all that cool shit that's going to come out soon. Not to mention the iPhone is the "world's best iPod." Of course people are going to hook it to iTunes.

But with the Apple retail store shopping experience, nothing changes. You're still getting the same minimalist experience. You have to buy the iPhone at full price, and you can still ship it to Mother Russia or the Congo or wherever to be unlocked. Or, you can take it home, activate it, and AT&T cuts you a $200 credit to your account or a rebate check. I think the typical Apple shopper will forgo the instant discount for the convenience and coolness of shopping in the Apple store. The typical AT&T store shopper? Probably not.