How's this for a new price on the Apple ( AAPL) iPhone: free. Before you get your hopes up, however, let's just say the chances are very slim. Within hours of Apple's announcement Monday that it was cutting the price of the old iPhone by half to $99, speculation arose that AT&T ( T) would eventually cut the price to $0. Now that the iPhone costs Apple an estimated $130 to make, it's not a major leap to think AT&T is getting a better price from Apple for the phone and will bear all the customers' costs in exchange for a two-year service contract, say some analysts.
The move also would fit the pattern and progression of earlier cuts. The new $99 iPhone once cost $200, and before that, it cost $400. Apple fans may bristle at the notion of giving away the iconic iPhone. But some industry analysts say the gloves are off, and AT&T has one year remaining on its iPhone exclusivity pact in which to put the hurt on rival Verizon ( VZ). "They are the big gorillas in the market," says Telecom Pragmatics analyst Mark Lutkowitz. "They can afford to be aggressive in pricing," said Lutkowitz, referring to the possibility that AT&T would offer the iPhone for free. A pithy reminder of how far prices on popular phones can fall in a competitive market is the Motorola ( MOT) Razr. The Razr debuted at $600 in 2004, and by the end of 2006, it was a promotional freebie telcos were giving away in exchange for new subscribers.
The iPhone is in its third year, and new smartphones from Research In Motion ( RIMM), Palm ( PALM) and Nokia ( NOK) are threatening to steal some of the excitement. An AT&T representative didn't exactly slam the door on the free iPhone question. "Our pricing speaks for itself, I'm not going to speculate on the future." Here's the real reason you probably won't see free iPhones anytime soon. Free iPhones could attract a crowd of interested buyers, but they might be coming for the wrong reasons. Unlocked iPhones sell for about $400 on eBay. An iPhone customer could sign on for a free iPhone with AT&T, pay the $18 activation fee and $90 for the first month of service and cancel the service for a $175 termination fee. Total outlay: $283. That's enough for you to turn a profit on the deal, but not enough for AT&T, which pays Apple an estimated $300 to $500 per iPhone. Maybe that's why AT&T won't speculate on the future, when the resale value of iPhones could fall far enough to make free iPhones a promotional possibility.