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Where the iPhone Failed

In one sense, next week?? launch of the 3G iPhone marks a significant defeat for Apple. Of course, the original iPhone was a huge success in the U.S. and the new version will not only boost sales at home but help Apple become a significant player in the worldwide handset market. What it won?? do is change the dynamics of the handset market as Apple had hoped.and in the long term, that may be bad for consumers.

The original deal between Apple and AT&T (later matched by arrangements with a handful of European carriers) was based on a new revenue-sharing model. Instead lower the purchase price of the phone through subsidies, AT&T agreed to share part of its monthly service revenues with Apple.

The deal worked well for AT&T. One study, conducted this spring, found that nearly half of iPhone buyers had switched from other carriers. But the company was never really comfortable with the arrangement. When I visited AT&T headquarters in Atlanta last month and met with AT&T Mobility CEO Ralph de la Vega and other top executives, it was clear that they found the new iPhone contract far more to their liking.

This is a bit odd, because it actually may be a slightly worse deal for AT&T. Because the company has to pay the subsidy upfront and recover it over two years when it no longer has to make payments to Apple, AT&T has said the new deal will hurt earnings in the near term and boost them down the line. (For consumers, the gain from the subsidy is offset by the extra $10 a month they have to pay for service; on a net present value basis, it's a wash over a two-year contract.) But in business as in life, the value of staying in one's comfort zone should not be underestimated.

So why might this hurt consumers in the long run? The original deal hinted at a future where the carriers' grip on what handsets consumers get to buy might be broken. A significant number of iPhones--no one is sure how many--ended up being sold without contracts, unlocked, and used on networks other than those authorized by Apple. But if you buy an iPhone 3G on or after July 11, you won't be able to leave the Apple or AT&T store (or, presumable, other carriers' stores outside the U.S.) without having signed up for a service contract. This may end up being a big step back for consumer freedom of choice.

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