Sunday, June 3, 2007
Phone Subsidies Hurting Consumers?
Posted by Nurhisham Hussein in "THOUGHT" @ 11:00 AM
"The fight over customers is so fierce that, for new subscribers, operators will even offer their year-old models for as little as a penny. The tab for subsidies alone can set the operators back some $16 billion a year...Sounds like a bonus for the common man, right? Not necessarily. The operators recoup their spending by charging consumers steep prices for air time."
This article from Business Week echoes some of the thoughts that I've had for some time about the business model common to carriers in the US, Japan and Europe i.e. low, subsidized hardware prices in return for locked-in contracts with higher fees. This is in sharp contrast to the mobile market I grew up with and am used to - full price hardware, but no contracts and much lower fees. So this poll is about gauging your preferences, while letting me get this 300lb gorilla off my chest!
I'll admit - the economist in me cringes at the subsidy model. It isn't just the higher fees, everything about it screams monopolistic practice. By having lock-in contracts, you get some really skewed incentives:
•As it provides a guaranteed income stream to carriers, they're going to focus on new customers as opposed to existing customers. That's why new offers, campaigns and rebates aren't "grandfathered" to existing accounts. That's also why there's less of a focus on after-sales service.
•On the customer side, penalties for opting out of the contract means you'll tend to stay put to the end of the contract term no matter how much greener the grass looks on the other side. And if you're tying to move from CDMA to GSM, or vice versa, you've got even less incentive to switch.
•Since all handset sales go through carriers, phone manufacturers have very little market power. This reduces the incentive to innovate on the hardware side, unless it is features that might drive revenue for the carriers as opposed to features that might actually be useful to users.
•Another side effect is at the hardware retail level, there's hardly any competition at all - thus less variety and generally higher retail prices, to the point where subsidized prices aren't much of an advantage. Want an example? AT&T lists the Moto Razr V3 at $199.99 unlocked with no contract after a $50.00 online discount, T-Mobile offers it at $29.99 with a 2yr contract (minimum $29.99 per month) and after $50.00 mail-in rebate (list is at $199.99) - in Malaysia the list price is RM545 ($160 at current exchange rates) and it typically goes for RM450 ($130) after bargaining it down - brand-new, unlocked, without contract, and you can use it with any carrier. Let's take another example, the Sony-Ericsson P990i - oh, wait, you can't get that in the US.
•Getting back to the fees again, I typically pay RM190 ($56) a month for calls and data charges. That's true unlimited minutes, unlimited text messages, and flat-rate unlimited data - no fair use applies here. Even better, there're no restrictions to tethering. Sound good? And I'm on the most expensive carrier in Malaysia - you can get a 35% lower bill, if you're willing to settle for EDGE instead of 3G.
The bottom-line for a subsidy model is less choice, less competition, less and/or wasted consumer surplus. Sounds all bad doesn't it? Actually, there is only one class of customer that benefits at all from the subsidy model - and, surprise! it's the type of customer that opts for a smartphone/PDA phone. Why? Because the more limited market means that hardware prices aren't discounted much even in a fully competitive market, and this type of customer also tend to go for the more expensive, data-inclusive plans anyway. So while subsidies mean the average mobile phone user gets a bum deal, us geeks get to play with the latest toys - assuming it's adopted by your carrier, of course. And after you've finished with your latest contract. And if you don't mind the higher airtime fees. You can guess where I stand on this issue - give me choice, give me flexibility.
This article from Business Week echoes some of the thoughts that I've had for some time about the business model common to carriers in the US, Japan and Europe i.e. low, subsidized hardware prices in return for locked-in contracts with higher fees. This is in sharp contrast to the mobile market I grew up with and am used to - full price hardware, but no contracts and much lower fees. So this poll is about gauging your preferences, while letting me get this 300lb gorilla off my chest!
I'll admit - the economist in me cringes at the subsidy model. It isn't just the higher fees, everything about it screams monopolistic practice. By having lock-in contracts, you get some really skewed incentives:
•As it provides a guaranteed income stream to carriers, they're going to focus on new customers as opposed to existing customers. That's why new offers, campaigns and rebates aren't "grandfathered" to existing accounts. That's also why there's less of a focus on after-sales service.
•On the customer side, penalties for opting out of the contract means you'll tend to stay put to the end of the contract term no matter how much greener the grass looks on the other side. And if you're tying to move from CDMA to GSM, or vice versa, you've got even less incentive to switch.
•Since all handset sales go through carriers, phone manufacturers have very little market power. This reduces the incentive to innovate on the hardware side, unless it is features that might drive revenue for the carriers as opposed to features that might actually be useful to users.
•Another side effect is at the hardware retail level, there's hardly any competition at all - thus less variety and generally higher retail prices, to the point where subsidized prices aren't much of an advantage. Want an example? AT&T lists the Moto Razr V3 at $199.99 unlocked with no contract after a $50.00 online discount, T-Mobile offers it at $29.99 with a 2yr contract (minimum $29.99 per month) and after $50.00 mail-in rebate (list is at $199.99) - in Malaysia the list price is RM545 ($160 at current exchange rates) and it typically goes for RM450 ($130) after bargaining it down - brand-new, unlocked, without contract, and you can use it with any carrier. Let's take another example, the Sony-Ericsson P990i - oh, wait, you can't get that in the US.
•Getting back to the fees again, I typically pay RM190 ($56) a month for calls and data charges. That's true unlimited minutes, unlimited text messages, and flat-rate unlimited data - no fair use applies here. Even better, there're no restrictions to tethering. Sound good? And I'm on the most expensive carrier in Malaysia - you can get a 35% lower bill, if you're willing to settle for EDGE instead of 3G.
The bottom-line for a subsidy model is less choice, less competition, less and/or wasted consumer surplus. Sounds all bad doesn't it? Actually, there is only one class of customer that benefits at all from the subsidy model - and, surprise! it's the type of customer that opts for a smartphone/PDA phone. Why? Because the more limited market means that hardware prices aren't discounted much even in a fully competitive market, and this type of customer also tend to go for the more expensive, data-inclusive plans anyway. So while subsidies mean the average mobile phone user gets a bum deal, us geeks get to play with the latest toys - assuming it's adopted by your carrier, of course. And after you've finished with your latest contract. And if you don't mind the higher airtime fees. You can guess where I stand on this issue - give me choice, give me flexibility.
