With the announcement of the iPhone 2, I have once again got the bug to go out and purchase a new piece of technology.  With that said, I consider myself a pretty rationale person, so I wanted to do a quick cost-benefit analysis of the purchase decision.  As such, I broke my thoughts on the decision into three major considerations: (1) the value of the new technology - 3G, (2) the two year contract with AT&T, and (3) the opportunity costs of purchasing the phone.  With these considerations in mind, I did a quick cost-benefit analysis and came up with a decision (at the end, of course).

1.  3G - When the first iPhone came out, the decision to buy was pretty easy.  The EDGE network was too slow, and, whenever I am around WIFI, I have access to a computer - home, work, school, etc.  So, the most significant feature of the iPhone - access to the Internet - was completely useless.  3G makes the iPhone really appetizing for me.  It would fill in any gaps that I currently have in Internet access with a tool that provides adequate access to the Internet (although, the iPhone still does not fully support Flash, Silverlight, or any streaming audio format).  But, I have lingering doubts that with 4G (LTE and WiMax) right around the corner, 3G will be slow in comparison to whats around next year.  This leads me to my next major consideration - the two year contract.

2.  Two Year Contract - The second generation iPhone requires a 2 year contract through AT&T.  This contract will lock you into guaranteed rates of $30-45/month (depending on plan) for data on top of the existing voice plan.  This would result in phone bills of between $70-90/month depending on the voice plan you choose.  This contract is great for AT&T, but not so great for consumers.  Essentially, it locks you into paying premium prices for 24 months for a 3G technology that is almost guaranteed to be obsolete within 12 months.

3.  Oppotunity Costs - So, what are the opportunity costs if I decide to go with the iPhone?  I currently pay $5/month for text messaging.  The iPhone would increase my current contract by a minimum of $25/month.  Over 24 months (and factoring in a nearly risk-free return of 3% from ING), the contract alone would cost me $618 more.  Also, when signing a two year contract you automatically forgo the right to shop for better contract and possible future rates.  This is a huge opportunity cost, especially, considering how fast technology changes.

Cost Benefit Analysis - So, the costs in the case are pretty substantial.  The additional costs of the iPhone over the next two years would be at least $818 (purchase price + additional contract), while removing my ability to negotiate for better contracts over that period of time.  The major benefit - 3G data access - would fill any gaps when I currently do not have access to the Internet.  But, at the same time, it does not appear that the Safari browser will provide a “complete” internet experience.  For me the GPS and apps are quite trivial and will not factor into my decision.   As a result, I do not think the iPhone will provide enough benefit to be worth the opportunity costs, and as of today, I will not be purchasing the product.  But, of course, that could change when I see all my friends with one.  Sometimes, you just have to be a little irrational.

Update:  Gizmodo just put up an article on the true price of an Apple iPhone 2. What really amazes me is the apparent increase in the price of broadband from year-to-year—especially if you factor in cable and broadband Internet. Is it just me or does is the price of broadband rising? Economies of scale and scope suggest that the opposite should be happening. Which begs the question:  is the current price of broadband a reflection of true economics or is it the result of monopolies?

This entry was posted on Wednesday, June 11th, 2008 at 11:25 am and is filed under Technology. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.