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Really, Why Are Smartphones Still Tied To Contracts?
Matthew Yglesias at Slate wrote a year and a half ago about T-Mobile up-ending the cell phone industry by starting to sell phones and phone service separately. Yglesias wrote about the prevailing cell phone business model up to that point:
The customer walks out thrilled with the deal he got on his phone. Only later, when his ridiculous, complicated, and obscenely high bill comes, does he realize he has been fleeced.
[...]
The subsidy model is basically a scam, but it only arose thanks to our own collective mental failings. A phone-buying public used to getting high-end devices for $200 or $300 may simply balk at the discovery that a pocket-sized computer’s actual price is twice that or more. Until now, limited competition in the industry has let us optimistically believe that the American phone-buying public is the victim of unscrupulous business practices. But if T-Mobile can’t make this work, the lesson will be that the real fault lies with ourselves.
I always thought the underlying question was more complicated than that. First of all, if customers really realized that they had been "fleeced" after the first of their 24 monthly bills came in, that scam should only work on a particular customer for... two years, and then they would be wiser the second time around. But plenty of users stay with Verizon and AT&T year after year, getting new free phone "upgrades" that lock them into extended contracts. And besides, are so many phone buyers really that dumb, that they would take a "free" phone while entering into a two-year recurring billing contract, without thinking about how much that would commit them to paying in the long run? This is why I think that explanation doesn't meet the criteria of making realistic assumptions about how easy it is to fool the public.
Or if you think people really are that gullible, then the obvious question is why that tactic doesn't work for other products sold just a few feet away at the same Best Buy. While cars and other big-ticket items are often advertised for "No money down and just 24 monthly payments of $X", the vast majority of laptops and other expensive consumer goods are simply advertised with their sale price, and if you want to pay for them in installments, you can work that out at the time of purchase. If consumers are really dumb enough to be swindled into overpaying for their cell phones over two years, why aren't laptops and other items advertised in terms of two-year monthly payment contracts? This explanation makes inconsistent assumptions about how dumb we are.
And it can't be as simple as "Some people don't have the money to pay for the phone up front," because most places you enter into a cell phone service contract, will also let you buy the phone outright and set up an installment plan to pay it off (which of course is basically the same thing as paying it off over your two-year contract). You have to get a credit check to get on an installment plan, but you have to get a credit check to get on a cell service contract too. So that can't be the complete explanation either.
And then there's the twin mystery of why T-Mobile finds it profitable to do the opposite and avoid contracts entirely. This, at least, has a plausible explanation -- T-Mobile, with the smallest coverage area of the major cell providers, was looking for a way to differentiate itself from competitors that didn't involve slashing prices in proportion to their smaller coverage. So their phones don't work out in the boonies, but you know exactly what you're paying for when you buy the phone, and when you buy the service plan.
But why does everyone else continue to sell phones on contracts? Why do we still fall for it? And why don't the same tricks work for other expensive electronic goods?
The best explanation I've heard so far involves a combination of the following:
- Cell phones, unlike cars and laptops, don't look like they should cost as much as they do. (Electronics engineers know that of course it's harder and more expensive to fit fancy circuitry into a smaller space, but regular phone buyers instinctively think smaller should be cheaper.) So people would instinctively balk at the sticker price of a smartphone, even if it were payable in installments so they didn't have to have the cash up front. As a result, they pay instead through a more expensive service contract, even though the total ends up being more than if they had just bought the phone and paid in installments.
- Cell phones, unlike cars and laptops, are only useful when tied to recurring purchases of another product, the cell phone service plan. This presents an opportunity to confuse buyers who have no idea how much that service plan should actually cost, so they don't realize how much the service plan fee has been inflated to cover the cost of the phone. A laptop, by contrast, may only be useful when connected to the Internet, but there isn't a one-to-one pairing of laptops with Internet service contracts because multiple laptops in the same household usually share the same WiFi bill. And all cars require gas, but it would be hard to sell someone a cheap subsidized car and then require them to buy all of their gas from one overpriced vendor for the next two years.
These explanations are at least internally consistent, so they could be true. Who knows if they actually are true. Can you think of others?
The good news is that other cell phone companies are catching on: When I called the local AT&T store to ask if they had any "free" phones that came with a two-year contract, the salesman immediately steered me towards purchasing the phone and the plan separately, T-Mobile-style, saying it was cheaper. He said I could get a Nokia 920 for free with a two-year contract to pay $40/month, or I could buy the phone outright and pay it off in installments of $11/month, while meanwhile using the service plan for $25/month, for a lower combined price of $36/month. The local Verizon store said I could get the latest Droid for free with a 2-year contract paying $75/month, or I could pay the phone off in installments of $16/month while getting a discounted non-contract service plan for $65/month. So Verizon in this case doesn't actually make it cheaper to buy the phone outright and pay it off in installments, but at least it's a step in the right direction. (When I bought a phone from Verizon two years ago, they didn't offer any discount on their monthly service plan even if you bought the device outright. It has always been possible to buy cell phones at a full retail price, but of course it didn't make sense unless you would get a corresponding discount on the service plan.)
So this is good news, but it makes the relevant question even more difficult: Why is it that cell phone companies previously found it profitable only to sell phones on contracts, and now find it profitable to move slightly in the opposite direction? With any luck, soon the question will be a historic one: "How come cell phone companies used to confuse us about what we were really paying for our cell phones, and why did we put up with it?"
Can you find any statement that is incorrect?
Because telecom markets are monopolized (or at a minimum, duapolized), and it is precisely that level of control which allows them engage in predatory business practices.
Your Blog Sucks
You can most certainly get a smartphone without a contract, even as pay as you go. BH hasn't been paying attention.
I would argue that leasing a car is not unlike a phone contract, you get access to a way more valuable car for a period of time than the equivalent payment would get you.
Not that you get to keep the car after, but some people just go from lease to lease the way you describe going from phone to phone.
"There is more worth loving than we have strength to love." - Brian Jay Stanley
Uhmm, are they? I never bought any smartphone on contract with operator. The last phone I bought like that was a standard dumb phone many years ago.
Of course there are offers like that, but saying that "smartphones are tied to contracts" is bullshit. You just buy a phone, put SIM in and you're ready to go. If you're doing it in different way, that's your problem.
T-Mobile is losing money. Something in the $100m/year range.
Best Slashdot Co
Its like the story of the 2 bakers that had stores next door to each other, so were both not making much money.
One put his prices up, the other put his prices down.
Guess which one survived?
AT&T is the short-sighted baker who is still trying to charge you $10 for a loaf of bread and lock you into only doing business with them, because to do so makes them more money per customer.
T-Mobile has broken ranks with the price-fixing collusion of the big carriers, and are now trying to charge a fairer price and not lock people in, on the basis that Americans aren't actually stupid so will switch to a better deal. Honestly I'm not as sure as they apparently are about that one. T-mobile now make less money per customer, but are gambling on ending up with way more customers and it being a net win.
I hope T-Mobile are proved righ and do win because companies like AT&T badly need to be given a black eye for their sleazy price gouging and nickel-and-diming practices.
Quite simple really. As long as they can trap you due to lack of alternatives, they will. Once there are *viable* alternatives, then they wont do it any longer.
That aside, i do see many non-contract smartphones out there.. but they do cost you upfront, which is beyond many people's budget in this current economy. So i really dont see the point of the question anyway.
---- Booth was a patriot ----
If I had to pay the up-front $700 cost of the latest-greatest smartphone, I'd never do it. When it's only $200, I can generally scrape that together.
Tied plans are hiding the true costs of the smartphones Americans buy, which is encouraging high-end sales. We all essentially have our next phone on layaway.
So this is good news, but it makes the relevant question even more difficult: Why is it that cell phone companies previously found it profitable only to sell phones on contracts, and now find it profitable to move slightly in the opposite direction? With any luck, soon the question will be a historic one: "How come cell phone companies used to confuse us about what we were really paying for our cell phones, and why did we put up with it?"
As TFA points out, it's generally a pricing perception issue. People will part with $0 upfront and pay $XX per month rather that $600 up front and $YY per month; even if the second option is cheaper. Since the first option results in more money companies do that
Why did T-Mobile decide to do it differently? The cell phone business is a high fixed cost (the network) low variable (carrying a call) cost industry. T-Mobile, as TFA points out is a much smaller #3. Even so, their fixed costs are probably not proportionately smaller since they still have a similar service footprint except perhaps in low density rural areas. So they need as many subscribers as possible to cover the fixed costs; hence a move to differentiate themselves in the market.
I'm a consultant - I convert gibberish into cash-flow.
...and more importantly why should I care about his random "thoughts" of the day?
How does this crap get on the front page anyways?
Seriously, what is he twelve and never heard of any countries besides the USA.
Don't complain about syntax, grammar, or spelling. There is no.hell like input on android.
First, this article is stupid and made more dumber for reading it.
Secondly, people like to finance everything. You're just financing your phone. It just makes it a little more complicated that it's hidden in a monthly service. It's that simple. Doesn't need a story. Can we un-post this?
Do not meddle in the affairs of sysadmins, for they are subtle, and quick to anger.
when beta goes live I'm switching to bennethaselton.blogspot.com
Short version: "Bennett Haselton writes 1300 words on something that has been hashed to death a million times already."
Next!
Seriously, what is this shit doing on Slashdot?
Dear Slashdot: next time you want to mess with the site, add a rich-text editor for comments.
It's official, Slashdot has become Bennet Hasselton's personal blog.
It's not just "handsets are expensive, so we're selling them on an installment plan" or "because we provide locked-in service." It's because the cell phone companies, and indeed almost every other business, does not want a revenue stream at slightly above the cost of providing their service. Cell service providers want the greatest possible monthly revenue stream, which will almost certainly result in a higher margin, to occur over the conract period and beyond. They figured most of us wouldn't trade in their handsets every 2 years, which resulted in nice margins once the handsets were paid off. Did you see your cell bill drop after 2 years? I didn't.
If the cell phone companies could have gotten away with locking customers into 3-year+ contracts they would have, but that's a separate issue
It's not just T-Mobile nibbling away at AT&T, Sprint, and Verizon 2-year contracts. It's MVNOs putting pressure on the sacred 2-year contract, too.
At the risk of burning karma points, here's a consumer-focused article I wrote describing how MVNOs might save a consumer money in monthly service fees: http://www.bills.com/bills-blo...
The point is that they pay twice the price of the phone this way. If you find it convenient to pay double for phone as well as contract - by all means, do that.
This article is pretty bad from this prespective. It raises certain questions and explores them, while ignoring all other possible questions.
Which is a very pretentious way of thinking.
A few of the comments here hit it head on (i.e. upfront costs too high, lock-in, etc.).
But a really large factor = in the 1990s there were tons of cell phone companies and it was an emerging market.
And these cell phone companies had major infrastructure expenditures because at the time coverage was mostly near major cities.
The typical WIN-WIN arrangement with customer and provider is the customer gets a low price (and all the greatness of a phone that works anywhere, unlike a landline) and the provider gets the security of having a stable cashflow to continue to improve their product and experience.
But Verizon and AT&T are monopoly utilities, thank goodness there is still T-Mobile as a 3rd option.
I am disappointed by this article, even in a few of the question are good, in that apparently the author of the article didn't think that any history of the cell phone industry was important to see the present in context of the past. History always sheds quite a bit of light on the present.
Priest: "Universe from nothing, no laws of physics, sped up time"+ huge discrepancies. Creationism? No. Big Bang Theory
Because they make more money that way, doofus.
Seriously, who is upvoting this guy's blog posts in the firehose? Or does he have some dirt on the editors? Can't figure out why these BS BH posts keep making it to the front page...
An enigma, wrapped in a riddle, shrouded in bacon and cheese
The title of the article is:
"Really, Why Are Smartphones Still Tied To Contracts?"
However, this is really an American phenomenon - in most of the world the most common is to buy the phone you want "cash", then get a SIM card from the provider you want (or just move over your old SIM).
This also means that it's common to get a prepaid SIM if one goes abroad for more than a few days, in order to call/receive calls for cheap, and use data without being fleeced. It also means that the phones are not branded the same as the network, but branded as Samsung / HTC / Apple / etc.
Owning your phone outright generally puts you in a stronger negotiating position for maintaining service, since you're never locked in, you're always able to talk to a "retention specialist."
Really, Why Are Bennett Haselton Articles Still Being Posted?
After 2 years on contract my plan does not go down by the rent price of the device. So I have no incentive to keep paying the high price without getting a new device. At least this is how it worked until very recently.
For years, companies (and even some government entities) basically kept saying "can't afford something, no problem, finance it". Which is fundamentally what caused the meltdown in '08 -- too much borrowing, and financial institutions giving out credit like candy to people who couldn't pay it back.
People have been conditioned to believe that their wants are in fact needs.
Can't afford that $700 smart phone? No problem, get it on credit. Can't afford the new sofa for your house? No interest no payments. Can't afford that new house? We'll give you a mortgage anyway.
When your buying public doesn't really understand credit, and when everybody "needs" to have the latest and greatest thing, the lure of convenient monthly payments (which you may still not be able to afford) solves your problem.
If the average America has $15K in credit card debt, you seriously have to ask why people buy their phones on an extended contract?
Seriously, you're trying to find the answer to a far broader issue than just cell phones.
Lost at C:>. Found at C.
This is based on a lot of assumptions. One is that being "locked into a contract" is a big deal. As an adult I need a phone to operate in the modern world, a cell phone and ideally a smart phone (particularly given my career). I know that I will need this service, I know that I will almost certainly need this service for the next two years. What is the harm in signing a contract. The chances that I will need to break it are extremely low. Ultimately the extra cost I pay pretty much works out to the discount I get on the phone (it might work against me a bit but its not like buying something on a payment plan is that odd or indefensible either) not everyone can drop 600 bucks on a new phone, maybe they would rather drop 300 and pay 300 over the next 2 years.
Admittedly the place were you get screwed is if you don't update your phone in 2 years but since plenty of people want the latest and greatest this really isn't an issue and if you don't want a new phone you can switch to a provider like t-mobile.
Now this does leave the question of why T-mobile is providing contract free wireless. I believe the reason is that they can't compete with AT&T or Verizon. They don't have a good service so they need another differentiator. Having lower prices is part of it but also offering contract free options to people who actually don't know if they will have a phone for the next two years or who want to buy a phone so cheep that getting a break on its price doesn't really make sense. Frankly though, that 10 bucks a month you save bringing your own device doesn't work out to be a huge savings in the long run if you are buying a new high end phone every 2 years anyway.
This idea that there is one true way to buy or sell services or products is asinine. Different things make sense for different people. Comcast wants to push its contract free offers in counter point to Verizon Fios but since I know I will be in my home for two years and I will need an internet connection that whole time is it really that big of a deal to sign a contract with verizon for those 2 years? People are convinced that contracts are always awful but for many people they really don't make any practical difference.
"In America, first you get the sugar, then you get the power, then you get the women..." -H. Simpson
> For a purchase, you make payments on a $50K loan.
> For a lease, you make payments on a $25K loan, and at then end you either buy the car for $25K, or return it.
Not so much. For a lease, there is often a leasing company that makes the payments on the loan, collects the payments from the driver, and has a 35%-40% gross profit. In other words, the driver is paying 35%-40% more by leasing.
You can put actual numbers for a specific lease offer in this calculator to compare:
http://www.edmunds.com/calcula...
I think you'll find it's more like:
For a purchase, you make payments on a $50K loan.
For a lease, you make payments similar to a $35K loan, and at then end you either buy the car for $35K, or return it and pay mileage and other charges.
Meanwhile, I just paid $12K cash for a 2011 model. While you're paying $700 / month to appear wealthy, I'm investing that $700 / month to be wealthy.
To get Bennett "I can't just waste my own time, I have to waste other people's time too" Haselton his own EC2 or Azure instance so he can post his drivel all he wants without bothering the rest of us.
Yeah. I guess that wouldn't really get rid of him. But I can hope, can't I? Sigh.
No, no, you're not thinking; you're just being logical. --Niels Bohr
The author might want to walk into an ATT store these days. I was off-contract and wanted a new phone. Guess what, I bought my phone and I am still off contract meaning I can leave at any time because they didn't tie my phone purchase with my contract.
-1 Troll?
I wish I had a mod point to spare you, my friend. Except someone taking offense at your language, you make a great point. (Ironically, Bennet is very much pro-f-word.)
Every couple of weeks, Bennet Haselton has an idea, and much like Hugo Chavez, he feels that he and we have a duty to get into a lengthy discussion about his ideas on the matter. And who is he? He's a guy that started some once controversial websites and promotes internet freedom. So do I, by the way, though I don't make it my full time job. Are his ideas brighter and more wise than mine or yours? I can't say they are when he calls T-Mobile profitable.
But, apparently, timothy thinks his ideas are so important that normal Slashdot story excerpt length needs to be set aside any time he has something to say. So why should it be "Troll" behavior to question why his ideas are heralded while the ideas of most others can only earn a dominance of Score:5 at most? I think that's very relevant discussion on this thread. I M H O.
We should learn what we need to know about issues, before we decide what we need to feel about them.
Why don't other companies sell similarly-priced goods the same way?
Rent-a-Center, Aaron's, Buddyrents, ColorTyme, Best Way, Rent-2-Own... there are dozens (if not hundreds) of companies that offer rent-to-own deals on virtually everything. They all have the same business model; relatively low payments that add up to ridiculously high prices for things.
The reason it works is simple; people love immediate gratification and will take very bad deals to get stuff now rather than being patient and saving up for it.
You're just financing your phone.
Then why doesn't the bill automatically go down after 24 months to reflect that the loan is paid off?
"Bennett doesn't understand the concept of up front cost vs financing and why one may be more attractive than the other"
Or, you could just read 1200 words of stupid instead.
-Styopa
I've been in the telecom business but not the marketing end... I don't know about now but back then, the model was that phones were expected to last 18 months before the battery or something else gave out... So you wanted your customer to renew and tie in to a new 2 year contract when they were almost finished their current contract and prevent them from moving to another carrier.
Actually it's a T-Mobile created problem. Nothing stopped them from bidding in the 700mhz auction, except for the part where they blew all their money (billions in fact) on the earlier 1700/2100mhz AWS auction. Nobody forced T-Mobile to do that. A lot of industry watchers scratched their head at that move, wondering why T-Mobile was buying high frequency spectrum to build out a last generation UMTS network when LTE and the 700mhz auction were already on the horizon.
More to the point, there are whole swathes of the United States where they hold valid PCS licenses that they've never used. It's not a spectrum limitation in these markets, it's an unwillingness to invest the required monies to service them. T-Mobile will never match Verizon or AT&T's footprint. One they don't have the money, two they're on record saying they don't believe that sort of coverage is important to their customers. On that last point they may be right, there's certainly room in the market for a value oriented competitor to the big boys, but so long as they have grossly inferior coverage they'll never really be in a position to dethrone Verizon or AT&T.
Verizon and AT&T are often condemned for the behaviors of their wireline divisions, wherein they seemingly cherry pick the most profitable markets for FiOS and uVerse, leaving the rest to rot on last generation DSL service. The irony is that T-Mobile does the exact same thing with wireless but is rarely condemned out for such business decisions.
I want peace on earth and goodwill toward man.
We are the United States Government! We don't do that sort of thing.
One of the reason could be because some companies still reimburse only the contract monthly cost, and not for mobile phone itself. Some people do not want to use their personal phone, and prefer getting a new one, only for professional matters. In this case, the only way for them - if they don't want to entirely pay for a new phone - is to have a new contract, with mobile phone cost embedded.
This is only a problem in America from what I can tell.
In the UK and elsewhere in Europe, I buy my phone outright then buy connectivity to a network separately. I currently pay £12 per month (including taxes) for 300 minutes, 500 SMSs and unlimited data. The unlimited data seems truly unlimited so far.
We don't pay to receive calls or SMSs, so the low looking amounts shown there are more than adequate for my needs.
I change providers roughly once every 6 months as deals change to ensure that I'm getting the best possible deal, and I take my existing number with me at no extra charge.
With a two-year contract you are encouraged to think that you are getting a very expensive phone for free, and consequently it's not unreasonable that you are going to be paying serious money per month on the contract. Nothing could be further from the truth - the development costs on these things are not that much and the bill of materials is pennies.
Of course the geographical size of your country does not help - here in the UK we have 20% of the US population packed into a landmass half the size of California. I personally have a really nice phone that cost less than 100 pounds no contract, with unlimited data for 7.50 a month. Don't remember the last time I went out of coverage.
tl;dr It's a USA-specific problem
"Don't belong. Never join. Think for yourself. Peace." V.Stone, Microsoft Corporation
Interestingly, I just went through this. First, I had to convince my wife that the phones *do* need to cost that much when I went out and bought three plain ol' phones and one Nexus 5 at retail. The total for all of it was about 600 bucks after I found three unlocked phones on Ebay. That's a big amount of money, and that's all she was looking at. However, when we went to the local AT&T store to set it all up, the manager admitted this is the smart way to do it because it's cheaper in the long run. And, if something better comes along, I can change plans without fear of an early termination fee (as long as it's another GSM network). So I have a plan that has two more devices than my old contracted plan, includes more talk time, more text messages, and costs 40 bucks less. I had to give up my unlimited data, but I have never used more than six gigs in a month between two devices, and my new plan allows much more than that. I don't have to pay an extra tethering fee. I don't have to worry about when I can upgrade again. It goes on and on. And now I don't need a home phone, so I killed that and lowered my internet/cable TV bill by 30 bucks a month.