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.

However Apple may have missed out on potential revenue under this system, both because people were put off by the high initial cost of the phone (and thus never bought an iPhone anyway), and because users could unlock the phone for use on other networks, completely cutting AT&T out of the deal and thus cutting the additional revenue Apple would have received as well. This appears to all have changed with the iPhone 3G however, if it is truly subsidized, Apple gets it’s additional revenue up front and sells more iPhones due to the lower cost of entry.

But what about all that unlocking? Previously users could buy the phone from Apple, unlock the phone and use it as an iPod or use it on another network. Obviously if AT&T is going to subsidize the phone itself they will want some guarantee that users will actually become AT&T customers. This could mean that Apple will move to be more protective of the software locks that tie the iPhone to AT&Ts network, a new phone model with new hardware would be a good point to change any such locks in place to be more restrictive, but sources tell us another scenario is more likely. Apple and AT&T may require users to sign a 2 year contract before buying the phone at all, thus making all the concern over unlocking irrelevant. Users would end up paying AT&T either way so why unlock?

This puts the iPhone more in line with other competing devices on the market, typically carriers subsidize the cost of the phone and make it up with service fees. One of the biggest complaints about the iPhone was that users were being asked to pay for the phone itself in full, AND service fees, which Apple shared with AT&T. This new model and lower price should make the iPhone more attractive for many potential customers, even though AT&T is still the only carrier.