SHIFT: How the iPhone could have changed the cell-phone industry but didn't

Each week Adam Frucci takes a closer look at the latest gadget buzz in his column, Shift.

Image by Falon

The iPhone looks pretty sweet. Yep, it's got that fancy touchscreen that you can use two fingers on, it changes direction depending on how you hold it, and it can tell when you're trying to enter a number and when it's rubbing against a pack of smokes in your pocket. It's certainly one of the coolest phones ever designed, if not the coolest, and it's pretty much a guaranteed hit.

You can't really fault Apple on the design unless you want to be really nitpicky, but that's not to say they did everything perfectly. Apple is one of the only device manufacturers on the planet that has the sway to change how the cell-phone business is done, and the iPhone gave the company an opportunity to really change the American cell-phone market for the better. However, when that opportunity knocked, Apple decided to ignore it, leaving the consumer to foot the bill for their laziness.

The Great Rebate Debate
What makes the cell-phone industry in this country so lousy is the fact that in order to buy a phone, you need to sign up for some kind of long-term contract (typically two years). These contracts force you to stick with one provider no matter what. You want to upgrade to a new phone in a year? Well, if you want a rebate (which is why most fancy phones over here are so cheap) you can either re-sign with your carrier for an additional two years or, if the phone you want is only sold by another carrier, you can pay hundreds of dollars to cancel your contract early.

In Europe and Asia consumers aren't faced with these choices. If they want to switch phones or carriers they can do so whenever they please. Switching phones is as easy as swapping SIM cards, and they pay their cell-phone bills month to month. The catch is they also have to pay a premium for their devices, but they're used to it. There are no free phones for signing a contract in Europe, and the notion of having a device subsidized by a carrier is foreign to them.

Here in the States, however, people expect to get their phones for free or close to it. They sign these awful two-year contracts, but in exchange for their promise to pay hundreds of dollars in usage charges to a single carrier, they get $500 phones for less than half their "official" prices.

The Better Call
How could Apple have changed this? Well, it was clear from the hype surrounding the iPhone before it was ever announced that there was a huge demand for this product. People are willing to shell out more for it because of its features and, well, the fact that it's made by Apple. Apple could have sold their iPhone without attaching it to a carrier, allowing people to buy it without a discount and letting them choose who they want to provide service to it. Instead, they went with AT&T in as traditional a partnership as you can get. People will not only have to pay $500 or $600 for the phone, but they'll also need to sign up for two years of AT&T service.

You might be saying, "Yeah, but if there was no two-year commitment, the phone would cost over $1,000!" Not true. The iPhone costs Apple about $250 to manufacture, so half of the retail price is profit. That means the two-year contract isn't subsidizing anything and whatever money would go to lowering the cost of the device is just icing on the cake.

So what are we left with? A situation worse than when Apple entered the market. Now we're stuck with the idea that it's just fine to drop $600 for an unsubsidized phone and be forced into signing a two-year contract on top of it. Will this give other phone manufacturers the chutzpah to start keeping the contract subsidies for themselves? Let's hope not. The last thing we need is for one of the most blatantly anticonsumer industries in this country to start thinking they can rip us off even more. Thanks, Apple. Somehow we expected more from you.

UPDATE: We clarified the statement about the iPhone being 50% profit.