First off, I'm afraid I don't understand what a phone subsidy is, perhaps we don't have them in the UK or I've never seen them on a price plan here.
Assuming it's something you pay for owning a smartphone, would it still be there for a smartphone that costs nothing? If so, then the extra cost for the iPhone is still $49.
The comparison ought to be an iPhone v another smartphone and contract with comparable features, not an iPhone v not buying a phone at all.
In the US most phones are bundled with a service contract (typically two years). This reduces the line item price of the phone from list price to a fraction of list price (or zero). However, if the contract is terminated early, the balance of the list price is due. In addition, if a smartphone is bundled with the service contract, the purchaser must select a plan which includes data service.
ATT makes additional revenue by charging the same rate if you have bundled a phone with your service plan or if you are using your own unlocked GSM phone.
Tmobile, the other significant GSM carrier in the US provides a $20 a month discount for (and does not require a service contract) when the customer does not bundle a phone with their plan.
In the US ATT is the exclusive iPhone carrier and unlocked GSM iPhones are not available. Thus the price of the iPhone is $49, and it's cost over the course of a 24 month contract is $899 because of the terms required by ATT's standard agreement.
But any cheaper phone is still useless without a contract anyway? The difference isn't $899, it's $899 minus the cost of ownership of an equivalent phone. Even a free phone on a 2 year basic contract is going to be around $600-700, surely?
There are pay as you go options, but other than the lightest of users, I don't know many people who find it cheaper than a contract, especially if they use any data.
Apple dictates the iPhone's selling price (just as they do with the iPad, the iPod Touch, their computers, etc), even among third parties like AT&T. Given that the telcos make most of their money in the contract (and the upfront cost is marginal), haven't you ever wondered why they never competed on device price? Sure, not a problem in the US where Apple ceded control entirely to AT&T, but in Canada there is identical iPhone pricing across all carriers.
Wondered why Android devices with the same no contract prices go for "TWO FOR ONE!" and other values while the dated iPhone 3GS sat at $99?
Apple saw this as an image thing, and it has worked. Remarkable the number of people who'll talk about "giving away" Androids when the devices come with often thousands of dollars in contract fees.
But now the competition is underfoot. Wasn't it just a few days ago that Siegler was talking about how Apple wouldn't lower themselves to selling lower-end devices (which the 3GS overwhemlingly qualifies), and the sentiment was that they would never compete on price?
