Design is difficult

O2 has announced new tariffs to coincide with the release of the iPhone 3G on July 11th 2008. The advertisement for the new tariffs say:

“Best of all, the new 8GB iPhone won’t cost you a penny on our £45 and £75 tariffs. And it’s just £99 on our £35 tariff and new £30 tariff.

If you’d prefer the 16GB version, it’s free on our £75 tariff. Then you’ll just pay £59 with the £45 tariff and £159 on our £30 and £35 tariffs.”

Let’s compare the new tariffs as advertised on the O2 website:

With the exception of the £30/month tariff, the only difference between the contracts is the initial iPhone cost and the number of minutes included in the contract. I thought it would be worthwhile to analyse how the initial iPhone cost affected the total cost of ownership and I’ve decided to share my findings.

Before I jump into the analysis, let me state my assumptions.

1. 18 months is equal to 548 days. Reasoning: if you consider each year to be 365 days long, 18 months is 547.5 days but I round up to 548 days for an 18 month contract because I imagine a cell phone network provider would want to squeeze the extra day of revenue from you.
2. The total cost of ownership = a + (b * 18), where a = iPhone cost, and b = monthly contract cost.
3. No consideration has been made for any additional costs.

8GB iPhone

Free

To receive a free 8GB iPhone, you need to agree to either a £45/month or £75/month contract for 18 months.

The TCO of the 8GB iPhone on the £45/month contract is £810 and includes 1200 minutes of talk time. This contract offers 39.45 minutes of talk time per day. The TCO on the £75/month contract is £1,350 and includes 3000 minutes of talk time. This contract offers 98.54 minutes of talk time per day.

Not Free

If you opt to pay for your 8GB iPhone, you need to agree to either a £30/month or £35/month contract for 18 months.

The TCO of the 8GB iPhone in this case is either £639 or £729. The £30/month contract includes 75 minutes of talk time, which offers 2.46 minutes of talk time per day. The £35/month contract includes 600 minutes, which offers 19.71 minutes of talk time per day.

However, if you choose a contract lasting longer than 12 months with 600 or more minutes of talk time, you are entitled to a free Bolt On. If you take the 200 Anytime Minutes Bolt On, you can upgrade the average number of talk time minutes per day.

16GB iPhone

Free

To receive a free 16GB iPhone, you need to agree to an 18 month contract at £75/month.

The TCO on this contract is £1,350 and includes 3000 minutes of talk time. As stated above, you get 98.54 minutes of talk time per day with this contract.

Not Free

If you opt to pay for your 16GB iPhone, you need to agree to either a £30/month, £35/month or £45/month contract.

The TCO of the 16GB iPhone in this case is either £699, £789, or £869. The £30/month contract offers 2.46 minutes per day of talk time, the £35/month contract offers 19.71 minutes of talk time per day, and the £45/month contract offers 45.99 minutes of talk time per day.

Tipping Points

A commenter worked out the value for money tipping points for talk time use on each offered contract:

If you use 100 minutes/month on the £30 contract, then the £30 contract is better value for money. If you use 630 minutes/month on the £35 contract, the £45 contract is better value for money. Finally, if you use 1,350 minutes/month on the £45 contract, the £75 contract is better value for money.

Graphs

This graph shows the TCO of the 8GB iPhone alongside average daily talk minutes.

This graph shows the TCO of the 16GB iPhone alongside average daily talk minutes.

(I couldn’t figure out how to set the secondary Y-axes title in OpenOffice 2.4. It is supposed to represent the number of daily talk time minutes included in a contract.)

Note: these graphs were updated on 9th July 2008 to add average messages/day data

Conclusion

If you believe you need the additional talk minutes included in the free-or-reduced price contracts, then the extra TCO may not be of concern to you. However, if you do not need the extra talk minutes then I recommend you spend either £99 or £159 upfront to reduce the TCO of your iPhone.