Thoughts on O2's iPhone 3GS offering

by Dan Lane on 9th June 2009

By now everyone and their grandmother knows that Apple has a new version of the iPhone out, so we won’t dwell on the specs or why it’s different. Instead I’d like to take a look at UK operator O2′s approach to launching the handset, an approach that has come under a lot of criticism less than 24 hours since the announcement.

iPhone 3G in the bin

iPhone? Binned.

Let’s go right back to the beginning, when the original 2G iPhone came out it was a revolutionary disappointment.

By that I mean it had a stunning design rarely seen in mobile devices, at the expense of a sensible headphone socket.

It featured a revolutionary simple to use touch interface, at the expense of third party applications and most of all, in a 3G world it used the ancient 2G network (albeit with EDGE to bump the speed up slightly).

Perhaps the most revolutionary thing about the original iPhone was the way you bought it. Just pop into an O2, Carphone Warehouse or Apple store and buy an unsubsidised handset at full price then take it home and sign up to an O2 contract through iTunes.

For those of you unfamiliar with mobile phone subsidies they work something like this: Handset manufacturers sell their handsets to operators at a wholesale price. The operator works out how much profit they will make from your contract and reduces the amount paid for the phone accordingly to entice you into a long expensive contract.
This is why you can get the latest £500 Nokia handset for free on a £70/month 18 month contract.

Apple’s approach was reasonably different, I think you’ll agree.

Unfortunately due to a number of reasons (prohibitively expensive hardware and devices being unlocked and never activated being among those), Apple decided not to continue this practice with the iPhone 3G and went back to a traditional subsidised model. This meant that when the iPhone 3G was announced O2 didn’t have any money tied up in subsidised handsets and was able to offer an upgrade path from unsubsidised iPhone to subsidised iPhone 3G. Original iPhone buyers simply restarted their 18 month contract from the date of buying the iPhone 3G. Normally to end a contract early in that fashion you’d need to buy your way out of it, sometimes by paying off the entire remaining amount (X pounds per month times number of months remaining).

Now that the iPhone 3GS has been announced people, myself included, had some expectation that O2 would repeat a similar offer. This time, however, it’s not in O2′s interest to do so. They have money invested in subsidised handsets that they are due to recoup over the lifetime of the contract and if they allow you to exit a contract early they make a loss on that handset. There is some argument to say that O2 should take a hit to keep customers happy and that the iPhone 3GS contracts would keep customers around longer but lets face facts: O2 currently have the monopoly on iPhone handsets in the UK. You can’t go elsewhere without spending a fortune on an unlocked or imported handset. iPhone fans are stuck with O2 and so there is no financial incentive for O2 to offer any upgrade path.

Ultimately it’s not in O2′s best interest to throw money away to please customers who can’t realistically go anywhere else anyway.

So what else have O2 been criticised for? Well, on the 19th of June the much awaited 3.0 release of the iPhone software becomes available for all iPhone users and those with 3G or 3GS handsets will be able to take advantage of “Tethering”. That is to use your iPhone as though it were a 3G dongle to provide mobile broadband access via USB or Bluetooth. The iPhone already comes with “unlimited” data so a lot of people assumed that tethering would just be a feature that Just Worked.

O2 claim on their official Twitter feed that (without quoting any figures) “iPhone tethering costs more as it uses a lot more data than traditional browsing on your iPhone itself”. This is arguable and both sides could make a very convincing case from previously published figures. Let’s just assume that it is more than reasonable for O2 to charge a small extra fee to tack on the tethering feature and move on to the prices.
O2 have two monthly “Bolt On” packages, £14.68 for 3GB and £29.36 for 10GB. Both Bolt-Ons come with unlimited WiFi access via The Cloud and charge 19.6p per MB for excess usage.

These prices are almost exactly the same as O2 Mobile Broadband dongles (a generous 1p saving on 3GB and whopping 2p discount on the 10GB package) and in-line with almost every other operator’s mobile broadband packages which makes their offering competitive, even if it isn’t the cheapest way of getting online.

It’s easy to look at Apple saying “Tethering is a brand new feature” without mentioning operator charges and it’s easy to remember how we got out of our last contracts when we upgraded but under closer scrutiny is it really something we can justifiably get angry at?

In my mind, no.

Much as I enjoy being angry at O2 this is one occasion where I don’t feel justified. After all, O2 doesn’t exist to be my best friend, it exists to make as much money as possible for it’s shareholders.

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