Subsidize customers, not phones

As you may know, if you buy a cell phone today, you have to sign up for a 1 or 2 year contract, and you get a serious discount on the phone, often as much as $200. The stores that sell the phones get paid this subsidy when they sell to you, if you buy from a carrier you just get a discount. The subsidy phones are locked so you can’t go and take them to another carrier, though typically you can get them unlocked for a modest fee either by the carrier or unlock shops.

The phones are locked in a different way, in that this subsidy pretty much makes everybody buy their phone through a carrier. Since you are going to sign up with a carrier for a year or two anyway, you would be stupid not to. And except for prepaid, signing up even without a subsidy phone still requires a contract, you just don’t get anything for it.

Because of this, it is carriers that shop for phones, not consumers. The carriers tell the handset makers what to provide, and quite often, what not to provide. Subsidy phones tend to come with features disabled, such as bluetooth access for your laptop to sync the address book or connect to the internet. A number of PDA phones are sold with 802.11 access in them in Europe, but this feature is removed for the U.S. market. The carriers don’t want you using 802.11 to bypass their per minute fees, or they want to regulate your data use.

This method of selling phones is the biggest crippler of the cell phone industry. If consumers bought phones directly, there would be more competition and more features. But less control by the carriers.

That’s the only reason I can think of why they don’t do what seems obvious to me. If you walk up to a carrier and say you will sign the 2 year contract, but want to bring your own phone, they should be very happy to hear that and give you the subsidy. They can give it to you as a $10 discount for 20 months instead of $200 all at once and it would actually be cheaper for them. This would allow a much better resale market in used phones, and allow new and innovative phones — even open source homebuilt phones. Competition and free markets means innovation.

They could even exercise some control if they truly needed to. They need not let you just bring in any phone, they could still specify which ones are approved. I think that would be stupid, but they could do it. However, this would still not let them so easily control what applications you could get on the phone. For example, one reason they disabled bluetooth features (other than headset) on many phones is they wanted you to pay their fees to download your apps and photos over the network, not just sync them up to your computer for free. An open phone market would deprive them of that revenue.

So frankly, if they are so worried about just these revenue issues, then give me less subsidy. Figure out what you’re losing by letting me have my choice of phone, and take it out of the subsidy. I can still put in my choice of phone today if I am willing to pay the extra $200, but of course few want to do that, so there’s no market for such phones. This would improve that.

There must be some number which makes this work, and the innovation generated would benefit the carriers in the long run. In Asia, subsidies have largely gone away, and there is word this trend may be moving to Europe, where at least carriers are happy to have 802.11 in their phones. Let’s hope.

Carriers and control

The problem is that you are asking the guys who run the show to give up revenue they can see in return for the probability of other revenue in the future. Now you and I both know that if there were more innovation in the marketplace for phones, people would end up using more billable network features, even if they didn't buy so many ringtones. But cell companies are in bean counting mode, and bean counters only count the beans they can see. And they can see the ringtones and other downloadable silliness. They can't see anything else.

Sad really, as they are in a great position to make great heaping piles of money by providing the back end to a lot of innovative stuff, if only they could see past their noses.

Have they even tested different approaches?

What surprises me most is not the level of control the carriers exercise, but the virtual lack of experimentation. Would a higher buy in, i.e. phone price, and a lower monthly fee produce more loyal customers? More Revenue? Less Revenue? Do they know one way or the other?

Will uncrippled Wi-Fi and bluetooth reduce revenue, raise profit, have no effect? What's the lifetime value of a customer who brings his own phone versus one who buys the subsidized phone?

Are any U.S. carriers testing the waters? And I mean real market tests, not focus groups or market research.

I'm especially curious to see what effect Apple's iPhone will have on the marketplace. If nothing else, it will be different.

Overseas

The experiments have been done, in that there are offers like this overseas. Reportedly in some places it's a percentage discount if you bring your own phone, meaning it's a must-do if you by a big plan. In Asia, buying your own phone has become fairly common.

I think that they believe that the ability to offer customers free phones is a big win, and they could be right. They may well sell more plans with free phones and expensive plans than with expensive phones and cheaper plans. Once you offer free phones you have to subsidize the others as well, or so it would seem. The unsubsidized prices of many phones are quite scary to people, even though they will probably buy an $90 data+minutes plan with their $400 PDA phone, making the plan surpass the cost of the phone very quickly. Still, the customer may well like a $200 price on the phone more than a $400 price enough to eat that huge plan cost.

Definitely agree with you

Definitely agree with you wrt phone choice. I'm in the market for a new GSM phone now, and the offerings by the major US GSM carriers (Cingular, T-Mobile) pale when compared to what you can buy direct from the manufacturers. Also, I didn't realize some of the phones came with features disabled. (If this is noted on the carriers' web sites, I haven't seen it.)

The price points are important, perhaps more so in the US than Asia. There seems to be a mentality in the US that it's better to get a free phone, even if you wind up overspending on the service. Or perhaps buying something like a Cingular "Go Phone" is attractive because the phones are cheap (under US $20 in some cases) and you pay with prepaid cards.

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