The End Of Subsidized Phones Could Be Near

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For almost a decade and a half, mobile customers – and Americans in particular – have enjoyed a certain economic perk: phone subsidies from the major carriers. This meant you could, on sign-up, get a very expensive phone for at most a few hundred dollars and, as an incentive to hang around, upgrade that phone every few years. These subsidies seemed as God-given as freedom of speech and apple pie, but they may be on their way out.

I don’t want to stir up fake outrage at this move (and it’s not even a move, just a comment by the AT&T CEO at some conference, but in the Kremlinology of online babbling that’s as good as a contract) but it smacks of perfidy. Said Randall Stephenson:

When you’re growing the business initially, you have to do aggressive device subsidies to get people on the network. But as you approach 90 percent penetration, you move into maintenance mode. That means more device upgrades. And the model has to change. You can’t afford to subsidize devices like that.

Instead of allowing you to upgrade your $500 phone for $200, AT&T is already offering cheaper plans to users who don’t upgrade, thereby lengthening the upgrade cycle of phones from the traditional 18 to 24 months. This means you will miss two iPhone versions before AT&T even considers giving you a discount, if that happens at all and it means more BYO handsets.

To be clear, we need to remember that phone subsidies are actually imaginary and that we ultimately pay for our phones in our monthly bills. Subsidies have also held back U.S. customers’ freedom of choice. Europe’s initial refusal to subsidize phones – now most carriers worldwide subsidize – led to a number of service improvements including pre-paid SIM cards, cheaper, simpler handsets, and a number of roaming benefits. There was no reason to lock a phone to a carrier if that phone is crossing borders every few days. However, the U.S. market is monolithic. We rarely roamed and we rarely looked for pre-paid deals.

If there are two things I agree with here it’s that we upgrade our phones far too often and that hardware manufacturers think we are stupid. Stephenson isn’t directly addressing us in his comments is in fact preparing the handset manufacturers. They depend on regular updates to keep making money. Samsung, HTC, LG, and Apple have to release new phones for a number of reasons, primarily to maintain the perception of forward momentum and to please shareholders.

Look at this panoply of Galaxy phones, for example, each destined to be AT&T’s next “free” phone. Just as a shark dies if it stops swimming, phone manufacturers die if they stop selling phones. Therefore phone subsidies are great for manufacturers and, if you think about the incremental differences between iPhone versions, not so great for us. There is plenty of supply and, thanks to subsidies, artificial demand.

This move by AT&T stops that endless circle. But it isn’t fair. Why should the consumer suffer with a bum phone for three years or pay hundreds of dollars on top of an already expensive rate plan? Carriers pay lip service to low prices but if you want their “best” plan you’d best be ready to pay. To force BYO handsets and slow upgrade cycles to this is simply insult added to injury.

Essentially Stephenson is saying that back when AT&T was still trying to get customers, subsidies worked. Now that it has all the customers it could want, subsidies are unfair. What’s really happening? Carriers got into bed with the manufacturers and now they want out. We pay the price.