With the price of the new iPhone 3G significantly lower than the original price for the EDGE phone, by half in fact, many are wondering how Apple managed to cut the price so much. It is possible that Apple simply decided to lower their profit margin on the hardware itself, but typically Apple cuts prices in small amounts, like lowering the AppleTV from $299 to $229. The lowering of the iPhone 3G price to $199 for the entry model strongly suggests that Apple is allowing AT&T to subsidize the cost of the phone directly.
Previously AT&T could count on getting substantial service fees over the lifetime of the Phone, with Apple receiving a significant percentage of those fees, further increasing the profit margin on each phone sold. Read more