During an event last week, Apple announced that the iPhone 3GS would be available for free with a two-year contract. This means that you could walk in to an AT&T store and walk out with a brand new iPhone 3GS without spending an extra penny on the device itself. In addition, the iPhone 4 is now priced at $100, making it well within reach of a much larger potential customer base. Essentially, if you can afford the plan, you can afford an iPhone.
There has been some level of pundit speculation as to whether this significant price drop will negatively impact overall iPhone 4S sales. While a cheaper iPhone would certainly draw the attention of budget-minded new customers, the 4S is only an incremental update over the iPhone 4. Current iPhone users that see the most value in features like Siri or the more powerful A5 chip will still update, and many new customers will want the latest and greatest that Apple has to offer.
In all honesty, Apple gets money from every new iPhone customer. In addition to any portion of the service fees worked out in a contract with the carrier, the price reduction is covered to some degree as well. Even frugal customers that don’t buy apps, rent movies, or buy music are still contributing to Apple’s bottom line by simply using the iPhone. Nothing Apple produces is truly being given away for free, ever.
Third-party apps provide Apple with a big windfall as they collect about 30% of the revenue from each app sold. This is in addition to movies, music, and television shows sold and/or rented through iTunes. iBooks and digital magazine subscriptions are another revenue maker for Apple, making the iPhone a profitable device from the moment it is activated to the moment it dies.
So, has this drop in price actually had a negative impact on device sales? Apple has reported over 1 million pre-orders within the first 24 hours of being made available through Sprint, AT&T, and Verizon. This tops the previous pre-order record of 600,000 set during the iPhone 4 launch. Speculation as to whether or not this boost is the result of Sprint being added to the available US carriers aside, this is a sure sign that sales aren’t seeing a dramatic decline. If anything, the loss-leader of a cheaper phone is actually encouraging people to consider the latest model.
Bottom line: lower prices mean more sales. Even though the end user may not be dropping $200 for an older model, they’re still significantly boosting Apple’s bottom line throughout the life of the device. If anything, a free iPhone 3GS (which itself is still an impressive phone) will convince many last-minute holdouts to jump on board the world of smart phones.