06-03-2007, 07:00 PM
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Contributing Editor
Join Date: Feb 2007
Posts: 3,111
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Phone Subsidies Hurting Consumers?
"The fight over customers is so fierce that, for new subscribers, operators will even offer their year-old models for as little as a penny. The tab for subsidies alone can set the operators back some $16 billion a year...Sounds like a bonus for the common man, right? Not necessarily. The operators recoup their spending by charging consumers steep prices for air time."
This article from Business Week echoes some of the thoughts that I've had for some time about the business model common to carriers in the US, Japan and Europe i.e. low, subsidized hardware prices in return for locked-in contracts with higher fees. This is in sharp contrast to the mobile market I grew up with and am used to - full price hardware, but no contracts and much lower fees. So this poll is about gauging your preferences, while letting me get this 300lb gorilla off my chest!
I'll admit - the economist in me cringes at the subsidy model. It isn't just the higher fees, everything about it screams monopolistic practice. By having lock-in contracts, you get some really skewed incentives:
�As it provides a guaranteed income stream to carriers, they're going to focus on new customers as opposed to existing customers. That's why new offers, campaigns and rebates aren't "grandfathered" to existing accounts. That's also why there's less of a focus on after-sales service.
�On the customer side, penalties for opting out of the contract means you'll tend to stay put to the end of the contract term no matter how much greener the grass looks on the other side. And if you're tying to move from CDMA to GSM, or vice versa, you've got even less incentive to switch.
�Since all handset sales go through carriers, phone manufacturers have very little market power. This reduces the incentive to innovate on the hardware side, unless it is features that might drive revenue for the carriers as opposed to features that might actually be useful to users.
�Another side effect is at the hardware retail level, there's hardly any competition at all - thus less variety and generally higher retail prices, to the point where subsidized prices aren't much of an advantage. Want an example? AT&T lists the Moto Razr V3 at $199.99 unlocked with no contract after a $50.00 online discount, T-Mobile offers it at $29.99 with a 2yr contract (minimum $29.99 per month) and after $50.00 mail-in rebate (list is at $199.99) - in Malaysia the list price is RM545 ($160 at current exchange rates) and it typically goes for RM450 ($130) after bargaining it down - brand-new, unlocked, without contract, and you can use it with any carrier. Let's take another example, the Sony-Ericsson P990i - oh, wait, you can't get that in the US.
�Getting back to the fees again, I typically pay RM190 ($56) a month for calls and data charges. That's true unlimited minutes, unlimited text messages, and flat-rate unlimited data - no fair use applies here. Even better, there're no restrictions to tethering. Sound good? And I'm on the most expensive carrier in Malaysia - you can get a 35% lower bill, if you're willing to settle for EDGE instead of 3G.
The bottom-line for a subsidy model is less choice, less competition, less and/or wasted consumer surplus. Sounds all bad doesn't it? Actually, there is only one class of customer that benefits at all from the subsidy model - and, surprise! it's the type of customer that opts for a smartphone/PDA phone. Why? Because the more limited market means that hardware prices aren't discounted much even in a fully competitive market, and this type of customer also tend to go for the more expensive, data-inclusive plans anyway. So while subsidies mean the average mobile phone user gets a bum deal, us geeks get to play with the latest toys - assuming it's adopted by your carrier, of course. And after you've finished with your latest contract. And if you don't mind the higher airtime fees. You can guess where I stand on this issue - give me choice, give me flexibility.
__________________
"A planner is a gentle man, with neither sword nor pistol.
He walks along most daintily, because his balls are crystal."
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06-03-2007, 08:14 PM
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Thinker
Join Date: Feb 2002
Posts: 414
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Does anyone know math?
I know how to add and subtract, multiply and divide numbers. It is not rocket science. We have two track phones. We spend $50 on one and $30 on the other. We pay about $10 a month TOTAL for minutes. Of course, there is no subsidy but there is no monthly fee.
How the industry is getting people to spend this kind of money on this awful service is beyond me. I guess most Earthlings don't get math.
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06-03-2007, 08:15 PM
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Sage
Join Date: Oct 2006
Posts: 797
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If customers had to pay full non-subsidized prices for even the cheapest phones, they'd lose their minds.
As for the argument that airtime is more expensive here because you're locked in, that's simply not true. Vodafone's rates in the UK, for example, are double what any comparable rates in the US are.
I'm not a huge fan of being locked into a carrier, but subsidies are not without their benefits. The phones are significantly cheaper and much more accessible to the average consumer.
Malaysia isn't an Apples to Apples example, either. Malaysia's per-capita income is roughly 1/4 what it is in the United States. If they were charging US rates in Malaysia, I seriously doubt anyone would even buy one.
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06-03-2007, 08:17 PM
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Pontificator
Join Date: Mar 2007
Posts: 1,466
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Back in 1999, when cellphone were quite rare. Signing up for a 1 yr contract entitled me to a $400 discount. Nowadays, that subsidy has shrunk quite a bit. The lack of competition between carriers is appalling. For me, and other canadians...there doesn't seem to be any real deals.
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06-03-2007, 08:36 PM
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Pupil
Join Date: Jan 2004
Posts: 46
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I would prefer to not be locked in, but at this point it is fairly moot. I have no choice but Verizon as no other carrier has a signal in my area (and a poor one at that).
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06-03-2007, 09:14 PM
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Pontificator
Join Date: Apr 2004
Posts: 1,108
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Frankly, I doubt US prices would be any more reasonable without subsidies. People are willing to pay for it now, so carriers have no incentive to lower their rates, subsidy or no.
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06-03-2007, 09:22 PM
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Intellectual
Join Date: Jul 2007
Posts: 214
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Like all surveys designed to only elicit the response which confirms the hypothesis, there is at least one missing question.
In this case, the missing questions are (IMO):
"The price for service would be the same with or without subsidies, since it's the lack of real competition that keeps rates high. Companies will charge whatever they think the market will bear."
"Rates are actually lower now in the US, than when equipment wasn't subsidized"
"Eliminating subsidies won't matter until all the government forces carriers to allow consumers to use signal compatible phones on their systems, regardless of where they were purchased."
IOW, in the US, competition comes not just between GSM carriers, but the two CDMA carriers. If the consumers can't switch at will from Sprint to Verizon or the MNMOs, and if portable phone numbers aren't automatically portable based on ESNs (without delays or hassles determined by the carriers) eliminating subsidies has absolutely no effect.
When consumers were limited to carrier owned land-line phones and long-distance rates subsidized local rates, land line phone rates were actually far cheaper. The breakup of the phone companies in the US benefitted businesses and people who use a lot of long distance calling, but actually hurt the vast larger number of consumers.
The real bottom line is that the subsidy model really doesn't have a huge impact on what people ultimately pay for service, because there is no real competition. The fact that the carriers are maximizing their market can be confirmed by the fact that I don't think a single person in the US knows anyone that doesn't have a phone. Despite an enormous disparity of income.
$56 a month for calls and unlimited data sounds cheap by US standards, but how does the average monthly income in Malaysia compare to the average US income? You can get a huge number of minutes and unlimited data in the US for around $100 from some of the MNMOs, unlimited minutes for a few dollars more. Does the average US consumer make more than double the average Malaysian consumer? (of course they do)
Put another way, would people in the US trade their incomes for these incomes to get cheaper wireless phone rates?
http://www.mida.gov.my/beta/view.php...=18&pg=193
Nurhisham, the economist in you should be familiar with the term, ceteris paribus. Your lower rates have absolutely nothing to do with lack of subsidies. In your market, you're actually paying almost criminally high rates. Your rates have more to do with what the market will bear. I'd wager that a larger percentage of people in the US have cell phones, especially children in families (nearly all carriers have family plans that drop the cost per phone down dramatically).
In any market, people only pay what they need to pay, and nothing more, for what they perceive as the value of a product. US carriers would charge exactly the same, whether phones were subsidized or not. And consumers might not be free to buy any hardware they like, but they can eschew the subsidy for their phone to not be locked into a contract. They don't often do that, because there's little to be gained. Most won't even make the attempt to negotiate better rates through their carrier's retention departments when their contract expires.
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06-03-2007, 09:35 PM
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Magi
Join Date: Sep 2005
Posts: 2,341
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In a perfect world I would rather not see subsidies. Since it is not a perfect world I will gladly except them. Here's why...I recently picked up a new P4000 from Telus. The going non contact price is $549.00. On a three year contract it is $199.00 and many times it is a free upgrade. I always figure I have to give my money to someone anyway, so if they are going to commit to me with a discounted phone, I'll gladly stay with them for the term of the contract. If I chose to buy the phone outright I would pay more for the phone, and I would still be paying the same amount for my services. It's not like they charge more for contracted services to get the subsidy money back, like some make it out to be.
I think anyone doing the math is forgetting the fact that you still have to give your money to someone, so why not give it to the guy that is giving you something in return.
I firmly believe that if we see subsidies go away we will not see a decrease in overall costs, instead it will be quite the opposite. We wil be paying full pop for phones and the cost of our services will remain unchanged.
Liker I said, if they are willing to reward me with a cheap phone just for committing do do business with them for a given period of time, I'm more than happy.
Dave
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06-03-2007, 11:40 PM
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Philosopher
Join Date: Oct 2006
Posts: 554
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Sprint used to offer plans without a contract, I am not sure if it still does. The price was abot 10% higher than with 1year agreement. The catch was, you can't use Sprint phone on any other network, so if you cancel your service, you loose a phone number and money with the phone. If GSM carriers would offer plans with no contract, you would see much more competition, as user would jump from one carrier to another as soon as they see a slightly more attractive deal, that would create a lot of complications and abuse. Just remember phone slamming with land lines, someone calls you, offer to switch a carrier next thing you know, you get a bill from another provider.
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06-04-2007, 01:30 AM
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Editorial Contributor
Join Date: Jun 2007
Posts: 5,411
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Quote:
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Originally Posted by virain
Sprint used to offer plans without a contract, I am not sure if it still does. The price was abot 10% higher than with 1year agreement.
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And I believe that has to do with the contract, not any sort of phone subsidy. It's similar to a lease. You rent an appartment month by month, you pay more per month than if you sign a year lease..
I don't actually believe the rates on phone plans have anything to do with phone subsidies, or at least you wouldn't get better rates if you didn't get subsidized hardware. I certainly haven't, any time I have gone in and just bought a SIM with service to put in a phone I already owned. The rate is the rate. The contract (lease) in return for a lower hardware price is an effort to level their income and keep customers. You can always get out of that lease if you really hate the service. You just wind up paying for the hardware, and some early termination fee.
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