iPhone and 02: The business case

I have to confess my initial reaction was the same as that of Daniweb colleague Bill Andad; the lack of a coherent upgrade path for the new iPhone 3G S is some sort of idiocy by UK operator 02.

But then I got to thinking. And it's not. It's unfortunate and I wish they'd change their minds, but I don't think the lack of a free upgrade is unreasonable.

The bad feeling started, I would guess, last July, when 02 decided that everyone who had one of the original iPhones would be entitled to an upgrade by altering their contract. Simple as that. This, my friends, is how you set expectations.

There are a couple of bits of background information you need, mind you. First, the original iPhone didn't sell as well as the (until next week) current version. It didn't tank, it just didn't set the world alight in the UK. Second and more importantly, to put the iPhone 3G on the UK map, 02 subsidised the handset. Someone sat down and worked out how much the contracts would have to be, how long they'd need to last, to make them appealing and commercial. A glance at the figures would have confirmed as much - of course a high-end phone wasn't going to be 'free', the cost was going to be spread over a contract period. Fair enough.

By now, Americans and other non-UK nationals will be wondering what this 'subsidised' thing is about. I believe - happy to be proven wrong - that we're unique in the UK in that our phone carriers have the option to subsidise a high-end phone in return for a long-term commitment from the customer. Clearly they can then spread the cost of the phone along the contract.

The problem is that customers don't always see it like that. The fact is that I'm locked into my iPhone 3G contract until January (and a lot of people are reacting badly to this idea, not only on this site but here, for example) not because 02 are being scumbags but because I haven't paid for it yet. I have the option to pay the contract off by all means, but it would be a lot of money.

This is where I get back to the expectations being set badly a year ago. The whole phone industry is at it, it's not just iPhones and 02. In the UK we're accustomed to having a shiny new phone with an 'invisible' price tag when we're on contract, pretty much when we want it. A lot of carriers will send you one if you threaten to change your contract. We're also pretty much used to a phone industry being awash with money, which just isn't the case any more. For those reasons, we react badly when someone offers us no upgrade path to a phone we'd like, particularly when it's the same brand and same series of phones.

There are undoubtedly questions still to be answered. The price of the phone here compared to in the US is vastly inflated. Why we can't just pay the remainder of the handset cost off rather than pay the call costs as well when we'll be paying for them again on a new contract is a mystery. 02 could move on this and restore a lot of goodwill.

But we've no particular right to expect a 'free' phone every time there's one on the market. That's simple financial reality.

[happygeek]

I don't think anyone is asking for a free upgrade, but rather an upgrade route other than "pay off existing contract in full, pay for new contract in full, pay full price for new iPhone hardware" which is where O2 is at. Surely it would be reasonable, in terms of customer loyalty/relations, to say to those folk who are say 12 months into an 18 month iPhone 3G contract that they can upgrade at a reduced cost? Even if that reduced cost is the same as paying off the six months remaining and getting the handset at half price or similar, anything would be better PR than the media crapstorm that is raining down on O2 right now.

[GuyClapperton]

As I've said, I do think paying the whole of the contract off is crazy if you'll be paying for the call costs all over again under the new contract. As to nobody asking for a free upgrade, you can't be following the same people as I do on Twitter!

[happygeek]

Perhaps I should have said 'I don't think any reasonable person is asking for a free upgrade' instead :)

[bruceldavies]

The price of the 3GS being offered to new subscribers on O2 is NOT the full price, but the subsidised price - didn't reading the article mean anything?!

The problem here is that loyal O2 subscribers (loyal only because of the iPhone, no doubt) are being treated the same as O2 users wishing to walk away from their contracts - it might be the same for everyone, but it doesn't make it fair - it isn't. We're discussing existing users wishing to renegotiate their existing contracts (in practical terms, reset them).

For the 3GS to be successful they need to carry the existing user-base with them. So they'll need to come up with a fairer policy; a small financial penalty to cover the existing subsidy, and then treat existing users as new subscribers in terms of upfront handset prices and contract/bundle offers.

On principle I'm not prepared to pay twice for line rental and airtime bundles covering the overlap of the original remaining contract length and the new contract - that's just unethical. Try charging me £100 more for the handset, perhaps, but don't even think to charge me twice for something I only receive once.

Also keep in mind that the exchange rate isn't what it was when the 3G was introduced - so the 3GS is always going to be significantly more expensive compared to the equivalent US pricing.

[GuyClapperton]

Thanks for the comment, Bruce. I confess I haven't seen anything in my comments or Davey's that suggests that the 3GS is anything other than subsidised, although the original iPhone wasn't, for the record.

Maybe there's an argument for a two-tier contract - one with upgrades built in and one not, at a lower price. It probably won't happen, though. I disagree with your comment that 02 needs to come up with a fairer policy - they are the only source of iPhones in the UK (OK, you can get it sim-free but it's still locked) - they have a captive audience.

And courtesy of Apple, many of the new features will be free anyway thanks to version 3 of the software.

[bruceldavies]

Apologies, my comment was directed @happygeek, who said "...pay off existing contract in full, pay for new contract in full, pay full price for new iPhone hardware" which is where O2 is at." - this isn't the case at all, with regard to the new hardware.

To clarify, my point is that O2 need to come up with a fairer policy if they're going to benefit from carrying the existing community forward with them; there's much talk that Apple no longer need exclusivity for future handsets - the other networks want the iPhone, and are prepared to gear up their networks to support them.

You need to remember it's not just O2's existing customer base at risk here - it's Apple's, and they seem to have a better understanding of our importance to them than O2. If O2 aren't careful, they're going to lose exclusivity in a year's time, as well as a significant early-adopter segment in the marketplace, leaving them with the very price-sensitive lower end of the market.

[happygeek]

Bruce, I don' t think we disagree here. I am also arguing that O2 is wrong to be treating customers as they are and should be offering a discount of some sort for loyal customers to upgrade.

[bruceldavies]

I'm rather hoping O2 will send me a free G3S for pointing out the errors of their ways! <joke>

[virtualrosario]

the problem is that customers don't always see it like that?