iPhone mania once again sweeps across the land, but this time it's different. At first glance, it looks like the new iPhone 3GS will cost the same as last year's iPhone 3G. Not so fast. Last year's good deal has turned sour this year, and some early adopters say they've been smacked with a $200 "Apple tax." Many of those potential buyers — Apple's and AT&T's best customers — are angry.
Do we have a legitimate gripe? After all, we did sign a two-year contract just 11 months ago. Nevertheless, we're still angry. Deep down, the real reason for all this angst: It's called "the endowment effect."
Apple stretches the truth
The lure begins with enticing numbers: $199 for the 16GB model, $299 for the 32GB model, and a bargain-basement $99 for last year's 16GB iPhone 3G. Upon closer inspection, you see the truth through Apple's gauze-like veil of marketspeak: Those are the subsidized prices for brand-new buyers if they sign a two-year contract. But those who stood in line for the iPhone 3G last July would not get that subsidy. Some would even have to pay the full-boat price of $699 for a 32GB phone.
What's the big deal?
Those iPhone 3G buyers signed a two-year contract, and a year hasn't even passed yet. The problem is, they got a much better deal last year. Then, even if they bought the original iPhone a year earlier and still had a year left on a two-year contract, they would still be allowed to get a subsidized $199 or $299 price on the iPhone 3G. But that kind of largess is not going to be available from Apple and AT&T this year. And there's the rub. People are angry because they feel that something has been taken away from them.
Stockbrokers and researchers will tell you about the endowment effect, otherwise known as divestiture aversion, where people are much more bothered by something lost than something gained. I feel it myself. I had nearly forgotten about certain aspects of my experience purchasing the first iPhone in June, 2007. After paying $600 and signing a two-year contract for the iPhone, I can remember that sinking feeling I had when the iPhone's price was reduced to $400. What I didn't remember nearly as well was the way Apple bowed to price pressure and handed out a $100 store credit to everyone (including me) who paid $600 for the iPhone. I remembered the loss but not the gain. That's the endowment effect at work.
Don't get me wrong — even if I barely remember getting that store credit, I vividly recall the $200 price drop, and that feeling of remorse I had festering within me — the little devil telling me that I paid $600 for a $400 phone. Likewise, I remember with superb clarity the deal I got last year on an iPhone 3G, paying the same subsidized $299 price for a 16GB phone that brand-new customers paid, even though my 2-year contract was a scant 12 months old. So now, I feel like something's been taken away from me. It seems like I'll be forking over a $200 "Apple tax." But that's the cell phone business, circa 2009. Apple and AT&T aren't my friends; they're doing business with me. Their job is to make profits. From me. And you.
And profit they will
Apple built the iPhone 3G last year for $174.33's worth of parts, and then with AT&T, charged customers $92.99 a month (including a myriad of taxes and fees) for its cheapest plan to use it. Over a two-year contract, that amounts to $2,547.50, including the $315.74 cost of a 16GB iPhone 3G. Of course, it costs a lot of money to develop such a sophisticated product, and to set up a nationwide 3G cellular network to support it. But it doesn't feel like $2,547.50's worth of value. Add to that AT&T's nickel-and-dime price gouging such as this year's $18 upgrade fee, and the $5-per-month for 200 text messages (which amounts to paying $1,310 per megabyte), and it starts feeling like robbery. But that's the cell phone business.
What's a gadget-obsessed freak to do?
I simply must have the latest iPhone, so I'll bend over and pay up, that's what. But I have a plan. I notice unlocked and jailbroken iPhone 3Gs are fetching between $400 and $500 on eBay, so I'm going to wait about a week, and unlock my old iPhone 3G using the upcoming fix from those industrious hackers at the "iPhone Dev Team" for the new iPhone OS 3.0. Then, I'll get the (for me) $399 16GB iPhone 3GS rather than the $499 32GB model, because I don't really want to carry around that much music or video with me, anyway. Total cost, according to Apple's website: $421.35,including tax. My bottom line: After the eBay auction's over, I might just come out ahead, that is, if I don't factor in the $2126.15 I'll be paying over the next two years for the cheapest iPhone plan. Somehow, I'm not feeling like that's an endowment, not at all. Is that a good deal? You tell me.