How AT&T Should Handle the Online iPhone Price Backlash

Existing Customers Want Latest Model at Lower Price, Sparking Sniping on Twitter

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SAN FRANCISCO ( -- IPhone mania is biting back at AT&T.

A stream of online chatter that began shortly after Apple announced that a faster and beefed-up iPhone would hit AT&T on June 19 has swelled into an online tsunami of discontent among iPhone users upset that they can't purchase the new iPhone for $199. If they want the new iPhone 3GS, they will need to fork over at least $399 for the entry-level 16-gigabyte model.

The outrage has led to a Twitter petition asking AT&T to "offer reasonable iPhone 3GS upgrade prices." The petition link was re-tweeted dozens of times on any single web page displaying the AT&T-iPhone tweets. As of this afternoon, more than 5,000 people had signed the petition. AT&T did not respond to requests for comment.

Subsidized phones
So what's the iPhone's exclusive carrier to do? Of course, many consumers aren't aware that the handsets they buy to go with their service plans are subsidized by the carrier, who hopes to recover that cost by locking subscribers into two-year contracts. The $199 is the subsidized price paid by current 3G iPhone users; AT&T has to pay Apple a subsidy north of $350 for each iPhone it sells, according to some estimates.

Rene Ritchie, editor of, said when he explains the subsidy model to some of the blog's visitors, some invariably soften up and give AT&T an ounce of sympathy, while others don't care. Mr. Ritchie said many are simply conditioned to the idea of paying under $200 for even the smartest smartphones, thanks to Apple's move last year that set a new floor for the iPhone. "They paid $200 for the iPhone last year," Mr. Ritchie said. "It's an entitlement now."

One quick fix for AT&T is to pound the message that, come next Wednesday, users can update their phones with new -- and free -- iPhone software that will have many of the new iPhone's bells and whistles, including cut-and-paste functions, multimedia-messaging support, and wider search capabilities across e-mails and notes.

"They should remind their customers that phones that are 1 or 2 years old are getting a new operating system with most of the new features that are in the new iPhone," said Michael Gartenberg, VP-strategy and analysis at Interpret.

Goodwill gesture
As a goodwill gesture, the No. 2 U.S. carrier ought to do some backroom analysis and package a rebate offer on the new iPhone rewarding user loyalty and past spending, said Andrei Jezierski of i2 Partners, an internet and media consultancy that counts carriers among its clients. "I would think that they can afford to give away a rebate of $100 or so," he said. "If you consider longevity and loyalty, I don't think they would be losing money."

A variation on this idea would be to allow users to give their old iPhones to friends and get them to sign up with AT&T; as a reward, the carrier would apply a discount toward the coveted new phone.

Others, such as Bob Enderle, who consults on emerging technologies, suggest AT&T institute a fee-based program that lets users trade in their phones after a year, now that people are increasingly dissatisfied with their phones after just one year amid the waves of smartphones sweeping the market. He said when users trade in their 1-year-old phones, there could still be some value in refurbishing them for resale. "In effect, you're leasing the phone, and at the end of the lease, you own the phone," Mr. Enderle said. "This lets you up the old lease."

For current iPhone users who can't wait until their contracts expire to get the new handset, AT&T could also simply extend their contracts by a year to allow it to recover any residual subsidy costs.

Ignore the backlash?
But in the end, the question might be: Are marketers taking social-media backlashes too seriously? Marc Hausman , president-CEO of Strategic Communications Group, said AT&T should just suck it up because 90% of what's produced in social media is put up by 10% of the participants. Mr. Hausman said he suspects AT&T is hoping the outcry will run its course and blow over. Indeed, AT&T is likely more concerned about signing up new iPhone subscribers.

"Companies like AT&T need to be sensitive to customer feedback. But regardless of what people are saying in social media, the question is: Is the product moving?" Mr. Hausman said. "If it is, there's no value for AT&T to explain anything about costs or subsidies to its customers."

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