Live by the subsidy, die by the subsidy

6a00e55225079e8834013481782b84970c-400wiOne of the best things about this job is all the bright, shiny gadgets I get to play with and write about. Everybody, especially me, likes to see a steady stream of hot new phones coming from the big carriers, and lately they have been coming out faster than ever, at least one release every couple of weeks. It shows that the technology is progressing and gets people excited. It gives people like me stuff to write about. It is good for users who get more choice, good for phone vendors who sell more handsets…but is it good for the carriers? Does the hot new Android phone issued this week by Joe’s Telecom cannibalize the last hot new phone that Joe’s Telecom released just a couple weeks ago? Probably, and that will pose a problem for Joe.

There is no question that the carriers are feeling the downside of having so many popular phones available. Today AT&T announced that they were increasing the cost of swapping smartphones early from $75 to $200. That is quite an increase by anyone’s standards and many customers will certainly be cheesed off by it. Those customers will undoubtedly be the kind who read tech blogs like this one, as they will be the users prone to switching handsets early and often. However we all need to keep in mind that this increase (and the increases the other carriers will make to follow suit) may be essential to keep the flow of new devices that we all love coming.

In a memo to employees describing the change, AT&T justified it as follows:

This change to our exception pricing is necessary to maintain our ability to provide customers with the best selection of devices and maintain our leadership in the Smartphone category.

Of course the cynic in me snorts loudly at that comment; however, the more I turn it over in my head, the more it sounds pretty accurate.

I know such a view runs counter to the prevailing mood on the blogs over AT&T’s move, which amounts to “Go get a rope, boys!” However, before we start heating the tar we need to stop and consider what we mean when we discuss subsidized phones.

Each phone has a certain price that the vendor, for example HTC, sets. Most major phones these days have an unlocked fee of around $500. Next we can assume that the carriers like AT&T pay a bit less then that to the vendor. I don’t know for sure, but let’s say AT&T pays $400 each for the phones it buys in bulk. They then make these phones available to their subscribers, usually at a cost of around $200 or less these days with a data plan. Where did the other $200 go? That is the subsidy, the amount that the carrier is paying for you in the expectation they will make it back along with a tidy profit on the data and voice traffic they will bill you for. Most carriers will set the length of the contract to however long it takes them to make back the subsidy and whatever enormous percentage of profit they wish. After that you can swap to a new phone and start all over again.

However, if you swap phones before the subsidy has been covered, then the entire process breaks down. After all, you will still have the same data plan if you change phones three times in three months, the carrier will be making the same amount of money from you but will have paid three times the subsidy, which will cut heavily into their profit margin, and they won’t like that. They won't like that one little bit.

If they make less profit because some users are tempted to swap phones often due to the pace of new releases, the carriers will slow the pace. If their subscribers who bought the new, shiny HTC Droid Halibut running Android 6.5 (S’more) are likely to swap phones early because just two weeks after the Halibut is released the Samsung Galaxy Express 999 running Android 7.0 (Spotted Dick) will be released, then the carrier will either just not offer the Galaxy Express 999 when it comes out or pressure Samsung to delay the new phone or Google to delay the new Android version. Since without the carriers playing ball, these vendors would likely be locked out of the US market, they comply. Either way, we get less shiny, and that is bad.

The increase in the swapping fee is due to the fact that AT&T knows how many hot phones are out there now, with many more coming by the end of the year. From a business standpoint, they need to either increase the swapping fee to protect themselves from the profit hit swapping will cause them, or simply cut down on the new phones. It’s that simple.

Lord knows I am not going to defend AT&T. Say what you want about them and it will probably be true. I am sure their profits are obscenely excessive and I know their network quality is a disgrace, but business is business. I don’t really care how much lucre AT&T rakes in as long as we get our toys, and I fear that this fee increase is likely essential to keep our toy fixes coming at the current rate. There are plenty of reasons to hate AT&T, but this increase may not be one of them.

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Zealot Benmergui

Zealot is a former contributing editor at Pocketables.

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