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The Reality Distortion Field is starting to wear off, and I’m getting a bad feeling about the iPhone 3G. Don’t get me wrong – my complaint isn’t about the iPhone 3G itself or how much it costs, but about how much more it will end up costing U.S. customers than the original iPhone thanks to higher monthly fees, and how Apple and AT&T are hiding that price increase from potential customers. (It appears that things are different in other countries, where plans for the iPhone 3G are little changed.)

Apple’s tag line for the iPhone 3G is “Twice as fast. Half the price.” And indeed, the price of a new 8 GB iPhone 3G is now $199, down from $399. However, the 16 GB iPhone 3G drops from $499 to $299, also a $200 drop, but not half the original price. I’m willing to grant a certain poetic license for marketing slogans – if one of the two models is half the price, that’s good enough to warrant the tag line.

Things start to smell worse when you realize that the 3G cellular networking that gives the iPhone 3G its name both reduces battery life and costs more. As I reported in “Apple Announces iPhone 3G to Ship on 11-Jul-08” (2008-06-09), an unlimited personal data plan will cost $30 per month, up $10 from the original iPhone plan, when coupled with a voice plan that starts at $39.99 per month. (ZDNet.com has a list of rates for individual and family voice plans; note that you must add $10 per line to the family plans. Business data plans will cost $45 per month, and must also be coupled with a voice plan.)

So buying an iPhone 3G may cost $200 less than before, but paying the monthly bill will set you back $240 more over your 2-year contract with AT&T, for a total of $1,680 in subscription fees instead of $1,440 (previously, the lowest monthly voice+data plan cost $59.99 per month). How exactly is that cheaper?

Wait, it gets worse! Om Malik, in an interview with Ralph de la Vega, president and chief executive officer of AT&T Mobility, learned that SMS messages are no longer included in the data plan either, so you’ll have to pay extra for them. Previously, the data plan included 200 SMS messages per month. AT&T’s Messaging 200 plan, which includes 200 SMS messages, costs $5 per month, so it would seem likely that the iPhone 3G’s SMS plan would be similar.

(The iPhone 3G’s SMS rate details aren’t yet disclosed, and AT&T’s live chat customer assistance person was either unwilling or unable to reveal how much they’d be. An AT&T spokesperson told us that the company would discuss the specifics of SMS pricing closer to the iPhone 3G release date.)

So now the minimum monthly cost of an iPhone 3G is up to $75, raising the cost across 2 years by another $120, to a total of $1,800, and bringing the total cost of ownership and service of an 8 GB iPhone 3G to an even $2,000. That’s $160 more than the total cost of ownership and service for an original 8 GB iPhone (after the first price cut), which totals out to $1,840.

What about AT&T’s prepaid GoPhone plan, something that Apple reportedly required as an option for the original iPhone? Unfortunately, PhoneNews.com is reporting that AT&T has tentatively confirmed that GoPhone plans will not be available for the iPhone 3G.

It looks like you’re stuck with a 2-year contract, although it won’t be added onto existing contracts for current iPhone owners (the 2 year contract will simply restart). It’s unclear what will happen to the iPhone hacking community, which has proven capable of unlocking each successive version of the iPhone software so you could use it with other, possibly less-expensive, carriers. Apple’s international push will remove much of the desire for unlocking in other countries, and in the United States, there will apparently be some sort of penalty for people who don’t activate their iPhones within 30 days of purchase.

In the past, you could purchase an iPhone and activate it online through iTunes, which made it easy to avoid activation and instead unlock. However, in a major shift, the iPhone 3G can be purchased and activated only in person at Apple and AT&T stores, which not only takes 10 to 12 minutes, but will make it nearly impossible to avoid activation. The lines are going to be awful the first few days, with each transaction taking far longer than at the iPhone’s launch in 2007, when purchasers could head home and activate online. (Perhaps this will be an easier process for an existing AT&T customer transferring her current phone number, or for a current iPhone owner – could the phone’s SIM card simply be swapped in and the plan updated?)

The reason for this change is the way AT&T’s contract with Apple has been renegotiated. Gone is the revenue sharing deal that gave Apple a portion of your monthly fees (as much as $18 per month by some estimates). In place of that, AT&T will pay Apple more for each iPhone, thus subsidizing the lower initial cost to customers. AT&T’s press release says that this revised agreement “is consistent with traditional equipment manufacturer-carrier arrangements,” and “both iPhone 3G models will be offered at attractive prices to broaden the market potential and accelerate subscriber volumes.” So AT&T believes that lowering the initial price of the phone and raising the monthly fees will – by 2010 – generate more income than the previous revenue sharing approach. AT&T backs this up by noting that “average monthly revenues per iPhone subscriber are nearly double the average of the company’s overall subscriber base.”

I don’t have a problem with Apple and AT&T making moves to increase market size or profitability. And I don’t even really have a problem with the overall cost of the iPhone 3G, which seems roughly comparable with similar smartphones and their associated service plans (as Gizmodo’s chart shows).

What does bother me about all this is how both Apple and AT&T are making a big deal about the iPhone 3G being cheaper, Apple with the “Half the price” tag line and AT&T with its “$199 Starting Price Significantly Expands Mass Market Appeal” line in the press release, along with the bare-faced statement that lowering the initial price will “accelerate subscriber volumes.” That initial purchase will indeed be cheaper, but anyone who doesn’t take the higher monthly fees into account is either being deceived or is just plain stupid. I know it’s standard marketing practice to take advantage of the math-challenged with tricks like this, but it still feels underhanded.

And yes, I realize that Apple is just the manufacturer now, especially given that the revenue sharing plan has been dropped, but we’re talking about a cell phone that’s essentially useless without a voice and data plan, for which there is only one source – AT&T. So any discussions of cost must include the monthly service fees in addition to the initial purchase price.