Cellphone contracts getting even better!

Saul Hansell suggests that hated U.S. cellular carrier practices such as text message markups and fee-packed contracts ultimately give American consumers what they really want: predictable bills. In pursuit of this we learn of the psychological "nuances" of pricing and the "supersized logic" of using fat overage fees to upsell customers to expensive all-you-can-eat plans. "This year," he writes, "the deals are becoming even better."
His piece even claims that the industry would love to give up the adhesive contracts, early termination fees and locked-in subsidy handsets that it won't give up, even when threatened by congress.
Now all the carriers are selling heavily subsidized smartphones. They hate this state of affairs -- and wish that American consumers would just pay full price for the phones, the way people do in Europe.
Hansell's evidence for this is the iPhone, which was "unsubsidized" when it was $600. It only dropped to $400 and then $200, he writes, when they moved to subsidies. He implies that the iPhone launch was initially unsuccessful and that this shows Americans won't buy contract-free phones: "Consumers balked at the high upfront cost. By the second generation of the iPhone, Apple reverted to a traditional subsidy model." For customers, however, the only practical option with the $600 U.S. iPhone was to activate it on the standard subsidy-payoff contract, with a compulsory data plan to boot. Whatever the unsubsidized payment arrangements between Apple and AT&T, the contract arrangements between AT&T and consumers always assumed a subsidy. In fact, my recollection is that AT&T itself wouldn't even sell you that "unsubsidized" iPhone without activating a 2-year contract on the spot. Buying one from the Apple store did not enforce activation, but everyday customers couldn't activate on other carriers (or on a pre-paid AT&T plan) without using warranty-busting hacks that emerged only later. In fact, AT&T didn't market a no-contract iPhone until March, 2009 -- for $600-$700 depending on model, more than the original iPhone model ever cost "full price." Throughout his piece, Hansell writes often of people's confusion. He claims that even economists find cellphone plans baffling. But they're not hard to understand except in the nickel-and-dime details. Hansell's repeated evocation of "confusion" is reminiscent of when characters in novels continually ask what's going on, or when they wake up in white rooms: it's because the writer himself doesn't know. Excepting the Yale professor whose words introduce the article, the people quoted in it are carrier flacks and cellular industry analysts: a fair sign of a piece tossed off inside a snowglobe of PR.


  1. “[Carriers] wish that American consumers would just pay full price for the phones, the way people do in Europe.”

    Wait, what? For the most part we have the option of buying phones (which are expensive) on PAYG (which only costs you money when you use it and often has great discounts), or we have the option of buying a contract (which is expensive) and getting a cheap or free phone.

    The iPhone, for example, is so expensive on PAYG that practically everyone I know with one uses a contract. Both those options are still pretty cruddy, really, since on PAYG you generally can’t change carriers without paying to have your phone “unlocked” – and which is in fact impossible for the iPhone without voiding the warranty.

    Unless he’s trying to argue that we should pay full price for our handsets AND STILL pay for ridiculous contracts? I don’t know.

  2. But if you can’t trust giant corporate media outlets to truthfully report business news that many reporters, media shareholders and sponsors have stake in, who can you trust?

  3. The catch, of course, is that customers need to pay $30 or so extra each month for Internet access. For those who just want to talk and text without a fancy phone […]

    This person writes from the position of being an expert, but anybody who utters the above line should immediately lose their ‘expert’ status when talking about cellular ‘phones’.

    He doesn’t ‘get it’.

    Modern ‘smart phones’ aren’t phones. They’re portable communications devices that happen to be able to make phone calls. “Just a phone” won’t cut it when making phone calls is the least used and least desired feature. If the ability to make and receive calls from my phone were removed, but all the other features stayed, I wouldn’t really care all that much. I suspect many other people wouldn’t either. That basically destroys his thesis of charging you a little for the primary function (phone calls) and a lot for loading the occasional web page.

    1. I suppose that all depends on where you live, and the people you know.

      I for one don’t need a smart “phone”. I have a phone, no keyboard, no camera, just a phone. And it works damn good to. A lot of people I know have more media centric phones and do complain about the voice quality.

      I agree the carriers are missing the boat on people who essentially want a web connected PDA, or a smart phone, or whatever you want to call it.

      I also think that a smart phone is a jack of all trades and a master of none. Sure ever version gets better, but nothing seems to get mastered. The voice quality isn’t spot on, there are software glitches, battery issues, ect… All of those are technological movements forward, but sometimes reaching a plateau and perfecting key areas would be nice.

    2. Right on the money. I want an iPhone sans phone. Stilkl want 3G radio for data, but not the phone.

      I’m making do with an iPod touch at the moment, only because of the absurd cost and contracts associated with the iPhone.

      But yes – the author quoted really doesn’t get it, at least not in regards to those who are going to be ponying up the big bucks for fancy handsets.

  4. Having worked in customer service for Sprint, it was put to me that subsidizing the cost of phones meant that it could take up to two years for the provider to earn back the investment in a customer. Unsurprisingly this is why there are contracts, which are more expensive and more likely to piss off customers, as well as causing a lot of headaches for customer service representatives. It’s unfortunate that customers want the subsidy, even though it’s worse for everyone in the long run.

  5. Most countries have a culture of carrier subsidy for expensive phones, and those that do tend to look on those that don’t with envy.

    The problem is, many of the early emerging mobile phone mass markets used the subsidy to drive adoption and have now locked the contract plus subsidised handset into the mindset. What we’re seeing now is the carriers using this as a blunt instrument against the OEMs to drive the costs, and IMHO, quality down. This has lead to strategies in many of the key global carriers focused purely on cheap White Labeled ODM products which could be charitably described as not awfully good.

    The flip side of this, and the reason why the carriers are prepared to subsidise the higher end smartphones is life cycle. They live in mortal dread of customer churn, and long contracts with phones that can be updated easily with new features and services is the kind of thing the carriers love.

  6. One thing that I still don’t understand is why there are so few options for getting a smartphone with fewer than 450 voice minutes a month.

    I don’t make much in the way of phone calls at all (for one thing, I have a lot of trouble just hearing people over the phone). However, I do a lot of texting, e-mailing and web surfing.

    Seriously, do the phone companies not realize that some people might want a data-centric phone precisely because they don’t talk much?

  7. i think we pay WAY to much for our cell phones, and the contracts are ridiculous 2years (anything can happen in 2years – job loss,health issues etc.)

  8. One of the issues is that whether you are on a contract or going month to month, you still pay the same for service; there is no discount if you aren’t paying for a subsidized device. Walk into an AT&T store with your own phone and say “I want month to month, no contract service” and you’ll still get charged the same rates as the next guy who is getting his Blackberry subsidized. The only difference is he is locked for 2 years and you aren’t. As such, what motivation is there to not get a subsidized phone?

  9. The most pertinent question in all of this (at least to me) is why do these smartphones cost $600-700 when they cost half as much to make? They are making 100% pure profit off these handsets. Nowhere else in tech is the profit margin that high. As much as we like to blame that carriers alone for this, hardware makers take an equal part of the blame for jacking the price up for consumers. Congress should also be investigating this.

    I’d really like someone to explain this to me if I am missing something.

  10. Europeans are doing what? Buy expensive phones without contract? No, they do not.

    The monthly fee you have to pay to your provider includes the subsidiary you get on the phone, if you like it or not. So you better use up that subsidiary when you buy a phone, or else you loose money.

    Europeans are trapped in this logic, just like anyone else. Its a game set up by telecoms and phone manufacturer, and it is not set up for the customer to win.

  11. The most pertinent question in all of this (at least to me) is why do these smartphones cost $600-700 when they cost half as much to make?

    The published physical BOM (Bill of Materials) is only a part of the cost of creating a phone. As a rule of thumb, the cost of developing a new “platform” i.e. hardware (silicon, radio), integration of software, applications and testing runs to about $30M on a “known” platform like an RTOS or OpenOS, with an ongoing cost of $3-$5M for each rev of the form factor. That’s why you see companies releasing lots of phones which looks suspiciously alike.

    That’s purely NRE services costs which have nothing to do with the BOM cost that you need to amortise somehow.

    So, as an example, if Motorola’s breakeven point on the Droid is 1,000,000 units, there’s probably an additional $40 a unit+ on top of BOM that goes straight to sunk engineering cost.

  12. comments #10 and #11 combined tell the story.

    we’re being overcharged for the hardware, and
    then locked into long-term contracts because
    this large hardware cost needs to be “subsidized”.

    it’s all a big lie designed to rob our pocketbooks.


  13. I don’t know about you folks, but I absolutely love my cell phone carrier (Verizon). Sometimes I get frustrated when it’s time to pay the bill, but then I think about how good I really have it:

    *I pay for lots of minutes that I don’t use every month
    *I pay an extra 5 dollars a month for the ability to send a few 160 character messages and even more if I want to send blurry little pictures
    *My crappy Motorola V9M still cost almost 200 dollars with subsidies
    *If I want to take advantage of my V9m’s one good feature (turn by turn GPS), I get to pay an extra 10 dollars a month
    *Verizon is so kind as to take my already not-great V9m and stick its hilariously bad interface on top of it.
    *If I decide that I don’t want a cell phone anymore or want to move to another carrier, I get to pay Verizon a ton of money and then pay a ton of money to a new carrier for a phone and a plan.

    So yeah! When I think about all of that, I say, “Man, $57 per month? Psh! Here’s $67, my friends, keep up the good work!”

  14. The answer to all your questions is easy: people are dumb and wireless companies use this to make money. Same reason people lease cars even though it is smarter to buy; they want the Lexus but can’t afford it. Also, the cell carries make very little (around $10-$25) on the phones. Finally, if you want to have more control and get a cheaper monthly rate when you don’t take a subsidy go check out T-Mobile…

  15. with AT&T garnering $12 billion of bottom line profit in the past 12 months, I’m sort of getting the idea that maybe the subsidy model is actually working pretty well for them. Maybe it’s the convincing argument that sms messaging isn’t really data, and so we should pay another $20/month for the privelege.

  16. Look up North, and the monopolistic GSM operator (since we talk about “smartphone” they are not all available in CDMA) does even worth. It requires people to sign a contract just to be able to change their phone number to a local one (after moving cross country).

    The logic was as follow, and that’s actually a personal experience:
    – the plan I was on was no longer available and their system is designed to prevent changing a phone number with one of these non grand-fathered plan
    – as a “special offer” because I was at the end of the 3 year contract, they offered me that “super deal” which didn’t change what I was paying for, but *only if I signed a new contract*. Without signing the contract they would *force me* to pay 10 to 15 dollars extra, just to change my phone number. And I was not getting a new phone or what not. It was just a way to suck more money out of their customers.

    To summarize, with Rogers, if you don’t get a contract and not buy a phone, you pay 10 to 15 dollar more per month (on a 40$ + taxes bill). So when I read “contract are to subsidize phone” I just yell bullsh*t, at least here in Canada.

  17. I’ll never understand how US carriers can continue to fleece phone users for recieving texts (and voice calls?)

    European and other regions often pay for Voicemail retrieval, but even then there are “free” options (ie, voicemail calling you when a message is left).

    Hell, even in Australia who is still recovering / enduring the sort of telecommunications monopoly AT&T can only fantasise about, we don’t pay for incoming services.

    Someone needs to whip the providers into shape, pronto.

  18. Ken Englehart, a senior VP at Rogers, wrote in the Financial Post that Canada’s ridiculously bad and expensive wireless is actually a world-leader. http://network.nationalpost.com/np/blogs/fpcomment/archive/2009/11/11/canada-is-a-wireless-leader.aspx

    I know it’s the FP, and I know that’s part of the National Post which is credibility-challenged, but I still think someone on the editorial board should be blushing about running such a fact-free advert as an editorial.

  19. Americans don’t know how to save to pay for something. Everything is on credit. The bubble has burst and they still don’t know it. Forty trillion dollars national debt is a lot of money to pay back and the rest of the world will want to be paid when the global recovery comes. China will, they even fix firmly the exchange rate in US dollars. Still american big business goes for the easy profit, buy now pay later, Sadly no one ever does anything until the pain is great. So i guess there is much much more to come. We pray it doesn’t rub off on us Australians.

  20. @1
    See: Tmobile’s new rate plans.
    Their plans are no contract and goodish deals, but you have to have your own phone. Or they offer a discount on the phone for signing a two year contract AND paying $20 more for the same plan that phone-owners would get.

    So bring your own phone, get a deal; or sign a two year contract, get a discount (however the discount is negated by paying more for the plan).

    I get it… I get it…

  21. With line items like “Government regulatory recovery fee” why does anyone trust the mobile phone industry to actually have understandable contracts and pricing?

    And #23 I also recently heard about T-Mobile’s plan and thought it was a good start for the industry.

  22. The outrageous cost of my monthly Verizon bill was why I switched to Virgin Mobile once my contract finally expired. The yearly cost of an iPhone is more than I’m willing to spend and I hate trying to do computer-ish activities on a tiny interface–I’m saving up for they mythical Apple Tablet!

  23. I found that my contract and my bills with my previous carrier went from bad to terrible so I decided to shop around. Althought I had misgivings about prepaid service, I recently started with Walmart’s Straight Talk line and I am very pleased. I don’t have contract issues or complicated bills – I re-charge the phone each month without worrying about a contract. Their plans are incredibly affordable. I am saving $50 a month with their unlimited $45 a month over my previous carrier. I was even able to purchase a Smart Phone with Straight Talk that does not have the fees or bills associated with phones like the IPhone, but has similair features.

    For me and people who are always on their cell phones and do want to continue to haggle with their companies, Straight Talk is a great option.

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