Consumers Love Them, Carriers Hate Them; Why Smartphone Subsidies are Here to Stay

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Off-hand comments often give us some great insight into how a company really feels vs. its public position. Case in point: the chief marketing officer for T-Mobile USA let it be known how he really feels about smartphone subsidies.

Cole Brodman was speaking at a panel discussion at the Geekwire Summit in Seattle, where T-Mobile is also headquartered. One of the questions he and other panelists were asked was “If you had a magic wand and could change one thing in the industry, what would you change?”

T-MobileHis answer was he would remove device subsidies. This came as a surprise to the Summit attendees, because smartphone subsidies are what built the industry. That’s exactly why carriers hate the dual-edged sword that subsidies have become.

In a blog post on T-Mobile’s own site, Brodman elaborated his answer. “Purchasing phones at a steep discount (subsidized by wireless carriers) devalues the incredible technology innovations coming to market. It distorts the cost of devices and creates an uneven playing field for OEMs, carriers and retailers alike. Many Americans don’t realize the actual cost of the phones they’re purchasing with a two-year contract because the cost of that phone is included in the cost of their data plan and the fees associated with their contract,” he wrote.

SprintAll of this is true. Your $200 iPhone actually retails for $600, but Verizon, AT&T and Sprint make that back over a two-year period through monthly fees and data rate plans. Carriers allocate around $20 from the monthly fee, earning $480 on the phone over the course of a two-year contract. That’s also why carriers have much higher early termination fees with smartphones than they do with plain feature phones.

But that is hurting the carriers as well. They pay $450 for a phone, on average, and sell it for $200. It takes several months to make that money back, which is causing carriers to lose profit margin in recent years thanks to the advent of subsidies.

Brodman went on to highlight T-Mobile’s Value plans, which don’t use the subsidy model. Customers pay more up front, but get a lower monthly rate. “In the future, my hope is we will see the U.S. industry follow our lead and move away from the subsidy-only model,” wrote Brodman.

Verizon Wireless“Fat chance”, says Will Stofega, research director for mobile communications at IDC. “It’s not going to happen because they are in a bind. They’ve made these payments and the expectation is they would make good on these investments. So they are in between a rock and a hard place,” he said.

Finland banned smartphone subsidies several years ago and that saw its networks fall behind in device adoption, so they reinstated subsidies, Stofega noted. Voila, their 3G infrastructure took off. China is doing the same to get more people on their network and its market is growing.

India? Not so much. Its carriers do not offer subsidies. All phones are sold at full price and unlocked. And that’s why no carrier in India has the iPhone.

AT&T LogoIf the carriers all got rid of subsidies, assuming the government didn’t accuse them of collusion, customers would be furious because the great deal went away. At the same time, subsidies brought in customers, which did bring in revenue over time. So the carriers need subsidies, even if they don’t want them.

“It was a good thing when you were looking at initial deals some companies made to try to get back the lead in wireless” said Stofega. “Look at where AT&T was before it got the iPhone. Now, there’s no rational reason that companies do this other than the fact that everyone’s doing it. These types of things happen in the business world, where we gotta do it because that guy is doing it.”

So, continue to enjoy your $200 smartphone.




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