Full story: the launch of the 3G iPhone

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Apple's new 3G iPhone will be "free" to customers who sign up to a minimum £45 per month contract, it was announced this morning.

O2, which is distributing the 3G iPhone with Carphone Warehouse in the UK, said that the 8GB version of the device would cost £99 if a customer opted for either a £30 or £35 contract, but will be free on £45 and £75 contracts.

The larger 16GB version will cost £159 on £30 and £35 contracts, £59 on a £45 contract and will be free for customers paying £75 a month, O2 said.

Apple unveils £100 3G iPhone

The next-generation iPhone will go on sale in the UK and US on July 11 and will feature faster web browsing and GPS

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Both the 8GB and 16GB version will also be available for pay-as-you-go customers, with pricing to be announced later this month, O2 said. For full pricing details, see the foot of this article.

All contracts, which run for 18 months, include unlimited data, meaning that customers can browse the web as often as they like. O2's high speed 3G network offers download speeds of up to 1.8 megabits per second, which is similar to broadband.

The device – a mobile phone, web browser, and music and video player rolled into one – was unveiled in San Francisco by Apple's chief executive, Steve Jobs, last night. It goes on sale in the UK on July 11.

"With this new pricing, iPhone 3G becomes an unbeatable proposition," said Ronan Dunne, the chief executive of O2. The previous iPhone, which was released in the UK in November, cost £269 before the price was cut by £100 in April because of lacklustre sales.

According to industry sources, Apple had been hoping to sell as many as 600,000 iPhones in Europe last year, but the figure was more likely to have been between 300,000 and 350,000.

Sales have in part been hampered by the company's strategy of selling the device at full price to customers before they sign a contract. In two of the European countries where the iPhone has been sold — the UK and Germany — the price has had to be cut dramatically to ship more units.

In Germany, where T-Mobile was forced to reduce the price from €399 to €99, analysts said that the mobile network was likely to be making significant losses on the early model iPhone.

"The No 1 reason people didn't buy iPhones is because they just couldn’t afford it," Mr Jobs said last night.

European operators are understood to have twisted Apple's arm to allow them to subsidise the device for customers on more expensive contracts, which should bring the price of the device into line with similar, high-end phones, such as those produced by Nokia and RIM, which makes the BlackBerry.

The new 3G iPhone, which will go on sale in 70 countries by the end of the year, is likely to face tough competition from rival devices that also hit the shelves this summer.

RIM has said it will start selling a new BlackBerry, which is also 3G, in the next couple of months, and HTC, the Taiwanese handset manufacturer, will soon release its new Diamond phone — which like the iPhone has a touchscreen and is also 3G.

3G iPhone pricing details on O2

£30 contract

Device cost (8GB): £99
Device cost (16GB): £159
UK minutes: 75
UK texts: 125
Unlimited browsing: Yes

£35 contract

Device cost (8GB): £99
Device cost (16GB): £159
UK minutes: 600
UK texts: 500
Unlimited browsing: Yes

£45 contract

Device cost (8GB): Free
Device cost (16GB): £59
UK minutes: 1,200
UK texts: 500
Unlimited browsing: Yes

£75 contract

Device cost (8GB): Free
Device cost (16GB): Free
UK minutes: 3,000
UK texts: 500
Unlimited browsing: Yes

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