Why AT&T Can Afford to Sell the Facebook Phone for Less Than a Dollar

The Hidden Cost of the $1 Device

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Less than a month after introducing the HTC First -- the first-ever "Facebook Phone" -- AT&T announced it is cutting the price of the phone from $99 to $0.99 with a two-year mobile service contract.

AT&T and HTC downplayed the significance of the price cut, saying such promotions are typical in the mobile industry. But AT&T is just shifting the cost of the phone to the data plan, which will become more expensive over time.

2x3 fb introducing home
2x3 fb introducing home

Initially priced at $99, the Facebook phone isn't intended to be a high-end smartphone. Apple's iPhone and Samsung's Galaxy S4 cost $199 and $149 with a mobile service contract, respectively. Rather, it was a halo device for AT&T, HTC and Facebook and intended for Facebook "super users" who access the social network all throughout a given day.

The very nature of the phone is to be constantly connected to Facebook and, thus, always using data. Instead of texting, it encourages owners to use Facebook messaging, for instance. While this is excellent for Facebook, near-constant connection to the mobile web could come at the expense of consumers' AT&T bills.

"[The Facebook Phone] could be an incentive for one to buy more data than they actually end up using," said Thomas Pepe, CEO of analytics firm Validas. "It's like selling insurance. If you don't ever use it, is it worth it?" AT&T no longer offers an unlimited data plan for new customers and charges $15 for each GB of data used over a customer's limit.

Currently, the average Android owner uses 709 megabytes of data per month, the average AT&T customer uses 633 megabytes data per month and the average HTC owner uses 681 megabytes of data per month, according to Validas. AT&T sells 300 megabytes of data for $20 month, 3 gigabytes for $30 a month and 5 gigabytes for $50 per month.

Based on these numbers, the average HTC First owner is likely to pay $30 per month in data, given the 3 gigabytes is a huge jump over 300 megabytes and looks like a great bargain. The least costly voice plan for a new AT&T customer starts at $39.99 per month, meaning the lowest total individual plan would be $69.99.

Mr. Pepe predicts Facebook users will use more data than other smartphone users and the ramifications are customers either getting hit with coverage penalties or being scared into "oversubscribing," wasting money on robust data plans.

Reducing the price by $98.01 certainly makes it alluring to low-end customers and is undoubtedly beneficial for Facebook. Facebook intends to eventually sell ads on Facebook Home -- the home screen on the HTC First -- so the company potentially stands to increase its mobile ad revenue, now 30% of its total, with every device sold.

When Mark Zuckerberg announced the HTC First in early April, he alluded to how a lower-cost smartphone could help diversify a smartphone market that to date has skewed higher-income. As these markets develop, there will be generations of people in developing countries who will likely bypass the desktop computing experience and first interact with the internet via mobile devices. Selling a phone for less than a dollar certainly makes that possible from a hardware perspective. That is, until the data bill arrives.

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