T-Mobile’s Chief Marketing Officer says subsidized phones and two-year contracts hurt competition, hardware value
T-Mobile has always been one of my favorite carriers, from their status as the first carrier with an Android device to their relatively hacker and carrier-switcher (think back to early iPhones on T-Mobile) friendly policies and plans. Recently, a T-Mobile executive provided me with even more reason to like the underdog carrier. The executive in question is Cole Brodman, Chief Marketing Officer at the company, and he voiced his observations that subsidized devices and contracts actually hurt the cell phone industry and consumers.
Primarily, he was concerned with the use of deep subsidies to make smartphones appear cheaper, as he expressed in the following quote.
“[Subsidization} actually distorts what devices actually cost and it causes OEMs, carriers — everybody to compete on different playing fields, and I think it is really difficult, especially from a consumer perspective, because it causes consumers to devalue completely the hardware they are using…. It is amazing hardware, but it has become kind of throw away.”
As far as I can tell, he is right on with his accusation. First of all, subsidization of hardware drives contract prices up, which over time is worse for the consumer. Not only that, although it reduces the sticker price of a phone when you buy it, it actually artificially inflates the price of unsubsidized hardware. Think of it this way. The big carriers need to sell you on a two-year contract so that they can have a steady stream of income. It is unlikely that you would sign your contract with no incentive, so they point to a $600 phone and tell you they can give it to you for $200 if you just sign the contract. Most customers will go ahead and pick the low up front price for the device, even if it ends up costing them more in the end.
That's not even the real issue, however. As you can imagine, in order to keep people signing contracts, unsubsidized prices for hardware have to remain very high. Certainly, they do keep getting better at an amazing pace, but despite all this innovation the base price for current hardware never really goes down. In fact, with Verizon's $300 on contract devices it has begun to go up. The only devices that usually see drops are those that are either aimed at a budget market, or have fallen out of favor in the consumers.
So, what keeps smartphones from following Morre's law, which basically states that the number of transistors (power) of computer hardware will roughly double every two years while the price continues to go down? It seems as if a part of it could be carriers pushing to keep unsubsidized prices suitably high as to compel consumers to sign the contracts. Also, it gives hardware manufacturers little incentive to bring the manufacturing cost of devices down. If both a $500 and $600 device will be subsidized to $200 by the carrier, there is little competitive advantage to making a cheaper product.
Despite this seeming conflicting evidence, his quote about device devaluation also seems true. Thanks to contracts, consumers value phones bought directly from the carriers at much less than their MSRP. For example, take the T-Mobile Galaxy SII variant. On eBay, it is currently going for about $400-450 new and under $400 used at the time of writing. By comparison, the nearly identical international variant which usually isn't sold with a contract, goes for about $100 more when new, and retains most of its value at about $500 when used. Whether or not the devices should cost $500 to begin with is not the issue with this argument, because regardless of price contracts do seem to undermine the value of used hardware.
What this means is that those who purchase a phone under a two-year contract and pay the subsidized price for their device will, if they want to replace it before the contract is up, take a significant loss on the price of the unsubsidized phone. While they may get more than they paid for the device, it will usually not be enough to cover a similar, new device, especially if they try to get it from their carrier.This effect only serves to lock customers into their contracts even more.
There is, though, one thing smart cell phone buyers can do, and that is buy the devalued hardware at lower prices and then use it on their carrier of choice. Still though, the carriers often come out ahead. As of my research today, only one carrier offers discounted plans when you don't sign a contract, and that is T-Mobile. With the other carriers, even if you bring your own phone, they charge you the same as if you signed a contract. What this results in is you paying the subsidization fee, which is built into the cost of the plan, even though you didn't get a subsidy on your device. Clearly, then you might as well take the subsidy, but once again you are nearly being forced into supporting the subsidy/contract system.
At this point, you may be asking, "Well, the carriers try to make us sign contracts and subsidize our devices as payment. So what? I'm fine with that." There are a few things to keep in mind. First of all, there is the issue of subsidies lessening price competition between hardware manufacturers. Also, contracts reduce competition between carriers, because once you have signed the paper you are stuck. Even with recent changes by AT&T and Verizon to their "unlimited" data plans, many users will be unable to vote with their wallets and change carriers for another year or two. Contracts are basically ways to prevent customers from defecting without large penalties, and seem to allow the wireless carriers to make changes for the worse, and do things like lie about 4G, without much immediate consumer backlash or many consequences.
But mostly, the issue here is with freedom of choice. Thanks to the current contract system, it doesn't make any financial sense to go with an off contract device that you are free to stop using one month and start using the next, or change plans as you need more features. Instead, anyone who wants freedom from a long contract has to pay the inflated MSRP for their hardware, and even if they manage to snag a device deflated by contract pricing, will likely have to pay the same amount per month for their $500 phone as the person who bought a $200 or even a free with contract device.
It's perfectly fine if one person wants to get a subsidy, and will happily use their device for two years. Unfortunately, when the entire market is based off of this idea, it hurts those who, like me, change their devices or service often. I don't think I have ever kept a phone for more than 4 months, and change carriers at least three times a year to get the best deal. Still, I probably end up paying a lot for that freedom.
T-Mobile has actually been the carrier most clearly against this contract system, as they currently offer very cheap no contract plans which are what I currently use. Obviously, they are still guilty of the contract pricing on most of their devices, but Brodman does have an explanation for that. When asked about why T-Mobile didn't work harder to end contracts if his opinions were really true, he responded with this.
“It’s hard when the other three don’t want to play along. It becomes difficult because consumers vote with their pocketbooks, and they will almost always pick a low device price oftentimes over a low rate plan price or a bundled rate plan price. We’ve experimented with that model more than anyone in the country.”
The previous plans I mentioned before are their experimental model, and so far they have worked quite well for me. Their refusal to give in to the all contract pricing scheme is one of the main reasons I was so against the AT&T buyout deal, as there is serious need for a good no contract carrier in the US. Ultimately, it will take a very unlikely market shift to change the way smartphones are sold, but for now T-Mobile does offer the best financial deal for those who want choice. Of course, having only one carrier to choose from seems to defeat the purpose of this ideology, so I can only hope that AT&T, Verizon, and Sprint will soon change their ways as well. Even if it takes a mass exodus to T-Mobile (or whatever other carrier offers a better deal to consumers, if only to avoid sounding like a T-Mobile add) to get things to change, I hope that eventually we will be able to buy whatever smartphones we want at fair prices, and pay reasonable amounts for monthly service.[GeekWire]