If Phone Subsidies Decline, So Should Long-Term Contracts

The Wall Street Journal reports that wireless carriers in Europe are moving to lower or eliminate their phone subsidies and that the trend is coming to the U.S..

Most customers don't understand the size of the discount they get on smartphones when they buy them from a carrier along with a two-year service plan. Maybe you pay $199 for that iPhone, but Verizon or AT&T or Sprint are ponying up several hundred more to Apple.

The article speaks of how carriers are tired of seeing so much money go to Google and Apple and other handset makers and how excited they are to start pulling in some of that money themselves.

Of course, if you actually have to pay $649 for the low-end iPhone, purchases are going to drop significantly. But they're already doing this in Europe. Vodafone (half-owner of Verizon Wireless) won't subsidize customers in Spain anymore. You either have to pay full cost of the phone or pay it off over a 12-, 18- or 24-month installment plan.

Let's assume for the moment that the rest of the industry — the OS makers, handset makers, the app writers — put up with this and don't arrange for some offsetting subsidy. Clearly carriers have been putting up with subsidizing phones because they make back a lot the money, probably more, through the service plan cost. Why shouldn't wireless service be cheaper then? But in fact, prices are going up.

Not only are prices under the old subsidy regime unjustifiable, but to the extent that carrier subsidies are dying, so should long-term contracts.

The emergence of LTE as a standard 4G network will assist in this. Like GSM, LTE uses SIM cards to identify the user, carrier, and plan. No longer are Verizon phones Verizon-specific. You can move another LTE phone to Verizon by getting a Verizon SIM card.

Of course there aren't that many carriers in the U.S., so the competition necessary to allow customers to move around like this is a tricky thing. But it's bound to happen. Even two carriers are going eventually to use price to compete in an effective way.

The party may be over soon folks. The time when you could upgrade phones frequently may be ending. Don't assume you have no leverage, though. Shop around.