When Apple announced that the new iPhone 3G S pricing would be the same as that of the iPhone 3G at its launch, applause could be heard far beyond the Worldwide Developers Conference presentation hall. Since users moving from the original iPhone to the iPhone 3G last year weren't charged any penalties for upgrading in mid-contract, many people assumed Apple had cut some sort of deal with AT&T to put shiny new iPhones in the hands of early adopters. But within hours after the announcement, we learned that most iPhone 3G owners wouldn't qualify for discounted pricing on launch day, or, in many cases, for an additional 6 months or more.
Most existing AT&T iPhone customers who don't qualify at the $199/$299 price points (for the 16 GB or 32 GB models) can still purchase an iPhone 3G S for "early upgrade" pricing of $399/$499. Customers who bought their phones too recently even for that pricing can upgrade for full retail price at $599/$699. To confuse the situation even more, eligibility for the different tiers of upgrade pricing isn't as simple as how long you've had your phone... and in some cases AT&T's system for determining eligibility makes mistakes.
Wireless Subsidies and iPhone Pricing -- In the United States and many other countries, we rarely pay the full price for our mobile phones. These ubiquitous computing devices pack an incredible amount of technology into a pocket-sized package, and that's especially true of powerful smartphones like the iPhone or BlackBerry. Since mobile providers make most of their profits on our monthly subscriptions, they subsidize the cost of the phones to hook us on technologies that will steer us toward more-expensive plans. Devices lose their cutting-edge appeal over time in comparison with new models, so the carriers re-hook us with additional subsidies as our contracts come close to expiring. It makes sense that mobile carriers want to recoup any losses incurred when they sell us phones below cost. (Mobile phones aren't the only devices sold at a loss; most gaming platforms like the Microsoft Xbox 360 and Sony PlayStation 3 are initially sold below the cost to make them, with the manufacturers making it up with the residuals paid by game sales.)
The original iPhone was sold without any subsidies, and thus when the iPhone 3G was released in July 2008, AT&T was able to offer subsidized pricing to anyone who wanted to upgrade (and lock in to a new, 2-year contract). All the original iPhones were sold at full retail price, so AT&T didn't have any gap to make up.
Since the iPhone 3G was subsidized, AT&T wants to recover its costs on the phone, which is why the company isn't offering the full, discounted prices to all existing iPhone users. While we might argue that AT&T is missing a golden opportunity to build brand loyalty before it loses its exclusive contract with Apple, or perhaps the company might want to make up for the lack of MMS, tethering, or faster network supported by the iPhone 3G S, we can't argue that AT&T is being unfair for wanting to recover the capital outlay on discounted phones. But AT&T uses more than contract age to determine when users qualify for phone upgrades, which is creating confusion as the horde of iPhone addicts prepares to mass-migrate on a single day.
A Tale of Two iPhone Families -- Like many iPhone addicts, once the iPhone 3G S was announced, I quickly logged into  to reserve my model. I saw that I qualified only for the early upgrade pricing of $499 for the 32 GB model, sighed in disappointment, and made my reservation. I assumed pricing was directly tied to the age of my contract, but then I started to notice reports that upgrade eligibility didn't seem to be tied directly to contract expiration date. A couple days later, I also realized that we are a two-iPhone family, with my wife using my original, unsubsidized model, and perhaps we could upgrade that phone more quickly.
I decided to call AT&T directly to check my status, and that one call saved me hundreds of dollars. The online iPhone store shows you only your current pricing for a single line, not potential pricing for other phones on the same account, or when you qualify for the fully subsidized price. I learned that my wife's iPhone was immediately eligible for an upgrade, and my iPhone 3G (purchased on launch day in July 2008) would be eligible on 12-Jul-09; less than a month later, and only 12 months after purchase. I'd be able to upgrade one phone on launch day (swapping SIM cards after the fact, since my wife isn't nearly as geeky as I am), and we could upgrade the second a few weeks later. With a fairly new baby, we are looking forward to the improved photo and video capabilities of the iPhone 3G S - otherwise we would have kept my current iPhone 3G.
TidBITS contributor Chris Pepper encountered a completely different situation. Like me, he's in a two-iPhone family with an iPhone 3G for himself and an original model handed down to his wife (we do wonder how our wives put up with us at times). We've both been on AT&T for about the same length of time, although I used a BlackBerry for my first 5 months. We're on different AT&T family plans, but we pay within $20 a month of each other.
When Chris called in, the AT&T customer representatives informed him that neither of his lines was eligible for upgrades until his contract expiration dates. He was required to pay the higher early upgrade pricing even on his original, unsubsidized iPhone. At one point Chris and I were on the phone at the same time, talking to different AT&T representatives as we shared our findings over iChat. Despite our circumstances being extremely similar, our upgrade situations were very different.
Investigating Further -- After Chris and I compared results, I put out a call on Twitter and email to find out what other people were experiencing. The results were all over the map, with users in very similar circumstances (including the same subscription price tier) reporting very different upgrade eligibility dates. Fellow TidBITS editor Glenn Fleishman and I started to compare notes, and it became clear that contract date, last upgrade date, and price plan weren't the only factors involved in determining iPhone upgrade pricing.
I contacted AT&T representative Seth Bloom, who responded immediately to clear up the confusion. It turns out that phone upgrade eligibility, for the iPhone or any other hardware, is tied to overall account history, using a number of factors. Seth said,
"The main factor is how far you are into your contract. You will likely be eligible in the latter part of it. We also look as such things as how promptly you pay your bill, the date of your last subsidized handset, etc. Please note, though, that all of these factors simply add up to how early (i.e., prior to the end of the contract) AT&T can give another subsidized device to an iPhone customer.
"Customers can check their eligibility at http://www.att.com/iPhone or by visiting any of our company-owned retail stores. If you're not currently eligible, we'll give you the date you may qualify. You also can call *639# from your AT&T handset and receive a text with information about your upgrade eligibility."
A Mistake Was Made -- This made a lot of sense. AT&T, like any company, has higher and lower value customers. High value customers tend to receive greater incentives to stay with the company. Since I was paying, on average, $240 more a year than Chris, it's understandable that I would be able to upgrade sooner. But this still doesn't explain why Chris couldn't upgrade his completely unsubsidized iPhone on launch day. AT&T didn't pay a dime for it, and thus has no costs to recoup.
Chris called AT&T back for a third time and managed to get through to a supervisor who realized something was wrong on Chris's account. By AT&T's own policies, Chris should qualify for the full upgrade discount on his wife's older iPhone. The supervisor escalated Chris's case, and he should hear back in the next couple of days.
Since none of us have access to AT&T's eligibility algorithm, there's no way to predict anyone's eligibility for a discounted iPhone without checking with the source. I personally assumed I would qualify only after my contract expired, and I'm glad I called in to learn I was eligible immediately on one line, with the second following less than a month later. Chris learned that there was a problem with his account, and he will now likely be eligible to upgrade at least his older iPhone on launch day.
Call for the Best Price -- If you don't know, for sure, that you're getting the $199/$299 pricing, we recommend that you call AT&T, stop by a store, or  for your upgrade eligibility date. If you think it's wrong, especially if you have an original iPhone, ask to talk to a supervisor and see if there might be a mistake on your account.
And if you happen to be in Phoenix on June 19th, look for me in line bright and early at the Biltmore Apple Store.