There’s lots of fascinating research about just how truly horrible consumers and investors we all are most of the time. The field of behavioral economics has produced much scholarship along these lines. Princeton professor Danny Kahneman won the Nobel Prize for economics in 2002 for his research showing in essence that people make radically different choices based on how a question is phrased. We’re all suckers for huge annual sales or the supposed big markdowns off list prices that were never actually so high and so on. So it’s a bit of a bummer to see that AT&T and Apple will apparently be able to massively goose demand for the new iPhone 3G not by cutting the price, as you may have read, but by increasing it.
What? Have I gone completely mad? Isn’t the iPhone 3G starting at $199 instead of $399? Isn’t that a massive $200 price decrease? Not so fast. Purchasing an iPhone requires signing up for two-year voice and service data plans from AT&T. The cheapest voice plan starts at $39.99 and that hasn’t been changed, thankfully. But the cheapest data plan will now start at $30 instead of $20, a $240 increase over the two-year contract. There goes the $200 savings. Plus, SMS messaging used to be included but now it’s $5 a month extra, or another $120 over the two years.
So Apple and AT&T have actually INCREASED the minimum cost of the iPhone from $1,839 over two years to $1,879 — or $1,999 if you include the SMS fee. Some math geeks may object, pointing out that money in the future isn’t worth as much as money you pay now. You could, at least in theory, invest that couple of hundred bucks you didn’t have to pay upfront. But if you do a quick net present value (NPV) model in Excel, assuming you could earn about 5% on money you hold, the greater monthly payments quickly overwhelm any savings. Total two-year costs discounted at 5% annually (0.42% a month) are $1,759 for the old iPhone, $1,787 for the new iPhone or $1,900 for the new plus SMS. You’d have to earn over 15% on your money before the NPV’s converge.
And yet, the change in the up-front cost is expected to lure literally millions and millions of additional customers who wouldn’t even consider paying the old $399 price for the phone. I’m open to all commenters with other ideas but otherwise it seems like a sad statement on the state of the American consumer.
And p.s. this price change also makes the early critics of the original iPhone pricing plans lst year look even more idiotic. Apple had negotiated a sweet deal for consumers but now it’s history.