Consumer Mentality and Carrier Subsidies

Article from Slate discussing Wireless Carrier subsidies. Subsidies are the hidden fees that the AT&T, Verizon and Sprints of the world add to your bill so that you get that brand new smartphone for $200.  In exchange, of course you promise two years of service with them. But that is not all.

I thought most people realized this, but buried into your monthly payments is the rest of the cost of your phone. Ever notice that the full retail price of those phones at Apple starts at $650. How do you think you are getting it so cheap? It’s not the promise to stay with one carrier. It is that they get two years of overblown payments.

The sneaky trick here is that you won’t see a bill entry for “subsidy payment” on your monthly statement. It is just built into the service. So, if you are like my luddite father and don’t choose to get a new phone every two years when your contract is due, you keep paying this as a penalty.

But what the writer of the article seems to say is that the benefactor and the party pushing for this method of payments are the handset makers.

The carriers are exploiting our shortsightedness (and the fact that banks don’t offer a mobile phone loan product) to get us to pay much more for “phone plus service” than we would otherwise pay.

Where Biggs is right is that a move to a nonsubsidized model would be bad for thephone-makers, since the way the carriers run this bait-and-switch requires them to throw some extra scratch in the direction of Apple, Samsung, Motorola, or whomever. But consumers would be better off. There’s a reason we don’t buy cars that are tied to a particular oil company and feature a two-year contract to exclusively fuel your vehicle with overpriced gasoline from one particular vendor. The only reason the subsidy model has lasted as long as it has is that spectrum scarcity makes the market for network access rather uncompetitive, and lets exploitative business models live fairly long lives.

However, this is where I find a problem. “Consumers would be better off.” Is this true? Would we buy phones more often or, as I would suspect less, if we had to pay $650 for them? Considering how people scoff at computers over $100 now, I can’t see how weaning customers used to a $199 phone on to $600+ phones would be successful.

Instead, people would buy phones less often, which would mean handset makers would likely put out fewer new phones and innovate less often, because it wouldn’t be worth it for them to spend millions in R&D for a few customers instead of the millions who upgrade bi-annually now.

If this was the preferred method, you would see people fleeing the post-paid carriers for the pre-paid market where you buy phones at full price because you aren’t on contract with a cell phone provider. But that simply isn’t happening. Verizon and AT&T continue to grow and dominate.

Instead I think the more interesting angle to take here is the consumer mentality. I think there are two methods here to allow consumers to spend less for a phone upfront.

The current method of packing the fees in the monthly service charges and making it invisible. This is what most carriers do now.

Alternatively, you could go the T-Mobile route. T-Mobile doesn’t put the subsides in their service fees, which allows them to offer lower prices for service. Instead, they break up the full price of the phone over two years and let the customer pay it off slowly. There are two negative impacts I think this causes.

First, the customer sees their bill increase by about $25 per month. Instead of hiding it like the traditional carriers, they put it right in front of the customer’s face. I think the average consumer prefers not seeing it. They want the same bill every month, think about how people complain when their cable bill is never the same month to month. Second, they certainly don’t want to be reminded they are still paying off that same old phone 18 months in.

Second, this is a credit lending scenario. I recently experienced this payment plan at T-Mobile when I bought a $0 down iPad from them. It requires a credit check. Yes, the serious one with your SSN and a check of your credit worthiness. There are lots of people who won’t pass this, won’t like the credit score hit that having a credit check run does to your number, and finally, the typical $200 for a phone and hidden payments that AT&T and Verizon do has never required a credit check when I’ve upgraded.

With all this said, while you can tell what I think the preferred method is, apparently an AT&T executive came out today and said that the subsidy model doesn’t work.

Do you have a preferred method of getting a new phone? Do you have an argument for why one plan is better than another?

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