Analysts: Think twice before choosing iPhone contract

Analysts suggest that users pay close heed to 3G iPhone service contracts.

As the iPhone 3G goes on sale customers all over the world will have to navigate the treacherous waters of operator pricing, and all users have to be able to answer one question, according to Shaun Collins, managing director at CCS Insight.

"When asked how many minutes and how much data you use, and how many text messages you send every month you have to be able to answer. Check your latest bill, or two bills before going to the store," said Collins. Otherwise, users run the risk of paying too much.

The hottest trend when it comes to how contracts are fashioned, both for the iPhone 3G and in general, is what CCS Insight has dubbed the unlimited conversation. The idea started in North America and is now spreading to other markets. In Europe the U.K. and Germany are leading the charge, according to Collins.

Users can, for example, get an unlimited number, or a large number, of text messages or minutes for a fixed monthly fee. For example, AT&T will charge U.S. iPhone 3G users US$15 per month for 1,500 messages and US$20 for an unlimited number of texts. Going unlimited might protect against shock when the bill arrives at the end of the month, but users could also end up paying more than necessary, which is what AT&T and others are counting on.

"Operators aren't offering unlimited contracts out of charity," Collins said.

The iPhone has also improved its proposition in the enterprise market, and companies that are interested shouldn't settle for the sticker price, but negotiate the terms of the contract, according to Carolina Milanesi, research director at Gartner.

Her advice to consumers is also straightforward. "I think that although initially consumers will be drawn by the lower price of the device itself with time they will look at the overall cost of the device. The high contracts will only make sense for people who are heavy users, certainly not people who want a new iPod," said Milanesi.

Pricing has been at the heart of the iPhone 3G message since day one. "The launch of the first iPhone was all about the product, and when the iPhone 3G was launched it was all about the proposition on pricing and more flexibility for operators," said Collins.

The first version of the iPhone stumbled outside of North America because of how it was priced. But Apple learned from its mistake, and now the iPhone 3G is priced like any other phone, according to Collins, which has made it a much more formidable competitor.

"I think the way that the iPhone has been priced shows that operators are subsidizing the device somewhat aggressively. The high tariffs and longer contracts underline a need for them to have a return on investment," said Milanesi.

So far, the iPhone has had a big impact on the mobile phone market, and that will continue, this time around in the form of price pressure, according to John Strand, analyst at Strand Consulting. "Operators which haven't got the iPhone will offer aggressive pricing on similar products. I expect that the Nokia N95 will for example become 20 to 30 percent cheaper," he said

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