Subsidies, Carriers and Devices

Chris Zeigler of The Verge writes about nonsensical smartphone pricing, specifically touching on carriers as being the cause of these problems. I’d take it a step further: the problems are subsidies:

Seven months is not a reasonable life cycle for any durable product. You wouldn't buy a new TV, game console, Blu-ray player, refrigerator, or car every seven months. In fact, if a manufacturer discontinued and replaced your TV after seven months, you'd be pissed. But it's like an addiction: carriers and OEMs need the high they get from the fleeting sales bump after the release of an incrementally new model, a bump that quickly flatlines. Hilarious price adjustments ensue; a $199.99 phone falls to $149.99, $99.99, $49.99, and eventually free over the course of a single year.

Treating mobile devices like portable computers rather than “phones” cancels out a lot of the complexity surrounding their pricing. Computers are rarely subsidised — and we’re still happy to spend thousands up front for a new machine every few years.

The entire premise of my piece “The Cheapest Way To Buy An iPhone In The UK” is that buying a mobile phone outright — and unlocked — is more cost effective than taking a subsidised price from a carrier and paying through the nose monthly for the data plan:

If you do the maths, over 12 months I pay £620 for my phone and data plan, whereas a similar 12 month contract on Vodafone would cost £771.

This is still true today, but I think more people are realising it.

If a customer approached HTC directly and asked which phone they should buy, it’d likely be the most current flagship model. The same would go for Apple or Samsung — even if cheaper or older devices like the iPhone 4 are available. Current flagship models will have a longer lifespan and more features than older or cheaper devices.

Carriers are where the problems start: subsidising devices differently skews the value proposition. Carriers offer the same service to customers whether they buy a cheap device or an expensive device. Phone manufacturers will generally receive the same revenue whether the devices are bought directly or through a carrier.

I still feel that treating carriers like “dumb pipes” is the easiest way to visualise where money goes when you buy a new phone. Carriers will get their cash on a recurring monthly schedule, whereas hardware manufacturers will get their revenue in a single upfront purchase.

Skewing these business models will generally only increase complexity. I’d advise against it where possible: carrier lock-in, locked devices or extremely high monthly tariffs are more hassle than they’re worth.