Editorial: the American phone subsidy model is a RAZR way of thinking in an iPhone world
By Chris Ziegler 
posted February 23rd 2010 8:00PM
posted February 23rd 2010 8:00PM
The problem
The year is 2010 -- and things have changed. A multitude of market forces have dramatically and fundamentally altered the phone pricing landscape over the last 18 to 24 months in particular; carriers that once had a well-stratified range of feature phones priced between free and $100 plus a lone smartphone or two at the $200 price point now have a confusing jumble of smartphones and feature phones alike spanning the entire range. What's more, the supply chain has matured and R&D costs have been paid down -- a high-end handset that manufacturers needed to retail for, say, $650 five years ago before subsidy might run just $500 today (after adjusting for advances in technology). Confusing matters further is a continued push for relatively high-end feature phones like the HTC Smart, Samsung Wave, and LG Mini that often cost more than their smartphone counterparts.
The price pressure is enormous, and realistically, going above $99 on contract is now dangerous territory for anything short of a superphone. |
In practice, what does this all mean? To put it bluntly, it means that customers who choose lower-end devices are getting screwed, because no amount of subsidy can make up for the fact that you're paying just $100 more upfront for an iPhone 3G than you are for a lowly Nokia 2230. Verizon has even plainly admitted this in its defense of the infamous $350 "advanced device" ETF to the FCC -- it simply costs more for a carrier to front you a good price on a smartphone than it does a dumbphone. Price pressure has excluded the consumer from feeling that difference, unless -- in the case of Verizon, anyway -- they opt to back out of a contract early, in which case they're met only with negative reinforcement.
The solution
I'm not advocating that good phones should cost more than they do today. Quite the contrary, actually -- the real problem is that American carriers have yet to fully acknowledge the new reality that high-performance smartphones are commodity items, even as they load their lineups with them, and you end up with a traffic jam of devices and no way to effectively price them. But I'm also not advocating that carriers thin out the herd (I'd never dream of suggesting such a thing). Instead, I'm arguing that carriers need to rethink everything about the way they incentivize commitments, and maybe even rethink the concept of a commitment altogether.
Most American carriers partly recoup deeper subsidies on higher-end devices by requiring lucrative data plans, and as annoying as that is, I think that it's the closest we've come to nailing the real fix. The next step is to come to terms with the fact that, for all practical purposes, $0 and $100 are the same thing -- over the course of a two-year contract, the upfront sticker price you pay for a phone is trivial. Seriously, it's a drop in the bucket: total cost of ownership for a smartphone on any of the US nationals can run beyond $3,000 by the time your 24 months is up.European carriers -- operating in a more mature market than their American counterparts -- have long since figured this out, and have completely turned the subsidy model on its end. You can get virtually whatever phone you want for free, from the lowest of the low to the highest of the high -- the only difference is the required minimum monthly spend. It makes a lot of sense considering that carriers don't make money off your phone purchase, they make it off your plan -- it's not pure gravy for them, but it's close enough so that they're comfortable deeply subsidizing your hardware. Besides, higher-end phones have been proven to generate higher ARPU (average revenue per user), which only serves to validate the model further.
So, Verizon, AT&T, Sprint, T-Mobile, that's really all there is to it: crib off your European cousins. There's never been a better time, what with the boys and girls in Washington bearing down. Stop trying to play the pricing game from the moment a potential customer walks into the store, because it's only going to get harder -- and rest assured, the days of selling $500 clamshells on contract are definitely over.
@Dpmt
Also why I have switched my phone to pageplus cellular.
I now pay 4 cents per minute period.
Seems to me the "solution" is to outlaw ETFs and simultaneously outlaw carrier locking. Carriers might actually have to compete on price and quality of service. It’s ridiculous!
I understand there is a lot of confusion here on European rates and subsidy models.
I would doubt there is such a thing as a "European Model", as rates and planes vary already considerably within single countries.
For example, here in Austria you get 1000min, 1000 sms (to all networks and fixed lines) for 10€. 1GB data is 4€ (and every following GB also).
No 2year contract, no additional fees, NO PHONE subsidy.
BUT, you also get a an iPhone from a different provider for 39€ a month and similar services (1000min,sms,MB) for a 2 year contract. (Lower for some feature phones of course). HOWEVER you also pay 39€ a month if you STAY in your contract for 5 years. There is no reduction after 2 years or so. Its up to you, to get a new contract/phone.
I guess this is for people who either don't have the money to buy an iPhone(or whatever phone) in the first place, or who just like the convenience of going to your mobile operator sign your contract and take away whatever gadget they offer you.
Also most carriers have two different brands for this. First the low-cost brand offering the cheap version via a webshop and second and completely different brand, with nice stores, better customer service etc.... for the high end plans.
So its basically a dual strategy. At least here in Austria.
OK, we have solved the problem of what we charge the subscribers for smartphones. Now we just need to figure out how to get them to NOT use the phones for data services on our network.
The US royally messed up with GSM/CDMA and choosing various frequencies. Why are we stuck on 850/1900 on ATT and AWS on T-Mobile? CDMA on Verizon and Sprint? Sprint won't just let you activate a non sprint phone despite being 100% compatible? This is ridiculous.
For this reason US carriers dish out millions to phone manufacturers to make SPECIAL VERSIONS of phones for them. HTC's Touch Pro 2 launched rapidly all over the world.... yet for the US carriers we needed a special one that took months to come out.
LG's Arena took a YEAR to come to AT&T despite a worldwide launch in 2009. WTF guys. We screwed up royally. Now we also want branded and locked and crippled phones. Thank goodness Verizon's slowly moving away from it. You wonder why we have the worst phone selection, the dumbest consumers, and the worst networks.
I'm sorry, we need to get consumers to understand that phones DO COST $500+. Why do iPhones cost $599 and Nexus Ones $529? HTC HD2s run for $630+. Get over free phones and subsidized phones. Unlocked phones is how the rest of the world operates. Stop begging your carrier to give you these phones for free and then not be able to handle your phone because their network is crippled. Let them spend money on network upgrades. Dumb Americans need to get it out of their head that they need special phone names like LG enV and Droid and everything else to be attracted to phones.
Honestly, subsidies worked well to get people INTO the mobile market. Now that the cell phone is a commodity item and the smartphone is turning into one too, I think it's fine to charge higher prices. We're not trying to get people to get a first cell phone anymore....
@dmo580
The US didn't have any choice of frequencies to use for cellular as frequencies such as 900 and 1800 Mhz were already in use for other services so they had to initially opt for cellular (850) and PCS (1900).
I just Bought an Iphone for around 900usd in China, the hongkong version witch its unlocked to all carriers, but i just found out that if I had buy it in Mexico with a subsidiary plan, it would had cost the same! so i dont get what its the problem ??
Price of phone / 24 = price you pay per month
If you cancel, you pay the difference.
Why is this so difficult????????????????????????
I know this comment is WAY down, has probably been said, and will probably never get read, but here goes.
You're suggesting we EXTEND the subsidy model? To be frank, WHAT THE HELL IS WRONG WITH YOU!!!!!!! Why the hell should carriers dictate our phones, it's usage and it's required monthly service rate? We need to do away with subsidies all together. Let us pay for what we pay for. Pay the cost of phone and the cost of the service seperatly. It is ONLY then that we will see true price competition and movement in the market.
There is also another flaw with the way carriers are doing business... though it may not apply for everyone. I personally don't have any credit and with lack of said being the case carriers are charging upwards of 500 dollars for a deposit for the first year for me to get a postpaid plan on top of the phone price upfront and a monthly bill with ETF's. This I find to be a bit ridiculous on behalf of the carriers.. I mean either I should paying early termination fees or I should pay a deposit but both is a little too much IMHO. Yes they do offer prepaid phone plans but have no options to upgrade, nor do they have a selection of phones, nor do they have any kind of real data plan. T-mobile has prepaid 3g data plans but does not offer the @Home wireless but to postpaid customers.. and some carriers dont have data at all. Guess Im just S.O.L. when it comes to getting a phone. hmmm i wonder how much it cost to move to Europe???
I quite disagree with this article.
I think the American subsidy model is an iPhone way of thinking in a smartphone world.
I mean Apple has been ALL about subsidies ! they even gave complete exclusivity to AT&T in exchange for an even bigger than usual subsidy !
So don't give people bullshit about a so-called new economic model Apple would all of a sudden advocate !
Now about the subsidies themselves it's just a very well disguised and not very transparent credit. You pay $199 for your phone right away and you pay +$20/months on your data plan.
Of course 24months * 20$ = $480 + your initial $199 that's more than the $549 you would have paid right away.
It's even more than if you had taken a loan topay for the unlocked phone.
Once again good advertising >> bad business => consummers get screwed and they love it.
Mobile access providers make their offers as complex as possible and it messes fair competition for smartphone manufacturers.
Nothing really new.
Or you can take the tack that T-Mobile is up to and make better pricing on plans with no subsidy on phones. Even on those you can pay off the cost of your equipment with installment payments if you wish so you don't have to pay the MSRP up front.
this should be tagged apple >:{