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3/9/2012
11:13 AM
Eric Zeman
Eric Zeman
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Why Smartphone Subsidies Won't Die

T-Mobile USA would love to kill phone and tablet subsidies, but it'll never happen. Here's why.

Smartphones don't really cost the $99 to $299 that most people pay for them at the cash register. In fact, they often cost two or three times those amounts. In order to reduce the price to more consumer-friendly levels, wireless network operators (read: AT&T, Sprint, T-Mobile USA, Verizon Wireless, et al.) subsidize the cost of the handset.

Rather than charge consumers full price for smartphones, the network operator eats some of the cost of the hardware upfront. It then recoups the subsidy from the consumer over the course of a two-year contract, which typically runs $1,500 to $2,500 in total.

This model has created an addiction for electronics, such as smartphones, that will probably never be cured unless the "cold turkey" method is employed by every participant in the wireless industry at once.

"It actually distorts what devices actually cost and it causes OEMs, carriers--everybody to compete on different playing fields," said T-Mobile USA CTO Cole Brodman, speaking at the GeekWire Summit in Seattle earlier this week.

He's right. The Motorola Droid RAZR MAXX, for example, is available from Verizon Wireless for the on-contract price of $299. Unsubsidized, the full retail price of the RAZR MAXX is the more formidable $649. The iPhone 4S (16 GB) has a similar subsidy. The on-contract price is $199, but the full retail price is $649. That's $20 more than the full retail price of a 3G/4G iPad.

[ Apple's new iPad will shake up the mobile network picture. See New iPad: Mobile Network Winners And Losers. ]

Which price do you think consumers choose when it comes time to buy a new smartphone? Most go with the subsidized price.

"I think it is really difficult," continued Brodman, "especially from a consumer perspective, because it causes consumers to devalue completely the hardware they are using. It is amazing hardware, but it has become kind of throw away. So, it is unfortunate, you've got dual-core, multiprocessor devices with amazing HD screens that get thrown away at 18 months."

Aside from hoping customers fulfill a two-year contract before updating to a new smartphone, network operators also use early termination fees. The ETFs serve two purposes: 1. Provide an economic incentive for the customer to stay with the carrier; 2. Recoup the cost of subsidized hardware if the customer chooses to leave before the end of the contract. ETFs for smartphones typically run $350, minus $5 or $10 per month that a customer remains with the carrier.

Since no one wants to pony up $600 or $700 every 12-24 months for a new smartphone, the subsidy model will remain. Subsidies, in effect, allow consumers to finance the cost of the smartphone over two years. Why pay upfront when you can rent-to-own? Isn't that the American way?

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EVVJSK
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EVVJSK,
User Rank: Apprentice
3/14/2012 | 4:07:07 PM
re: Why Smartphone Subsidies Won't Die
It cost Apple $198. They are charging more than that to the providers in some cases, especially when the device is relatively new. If you look out there on Amazon, you can likely get a better value of many of the phones that the providers say cost $XXX without a plan. My guess would be that value is VERY close to original price for WAY too long because they want to drive people to the locked phones with data plan.
ANewNickname
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ANewNickname,
User Rank: Apprentice
3/13/2012 | 10:29:08 AM
re: Why Smartphone Subsidies Won't Die
Oops. The Verizon information I referred to above came from the local VZW store last week. Today I see that both Motorola and VZW are promising that my device (a Droid Bionic) will be upgraded to Android 4 (ICS), but there's no firm date at this time. Re the flakiness, recent VZW updates seem to have a positive effect. There may be hope.
ANewNickname
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ANewNickname,
User Rank: Apprentice
3/12/2012 | 7:25:53 PM
re: Why Smartphone Subsidies Won't Die
In the carrier-centric US, you're screwed no matter how you buy your phone. If you pay full price, you're still stuck with the same carrier forever (or at least until you've amortized the extra cost to your satisfaction). If you pay the plan price, you're stuck with the plan. In either case you pay extra for data, whether you want it or not. ( I was given a hand-me-down iPhone 3GS, which I would love to use purely as a phone on AT&T's 3G network, and only use the smarts in a WiFi hotspot, but they tell me I have to buy a data plan.) I have a flaky Android device under a Verizon plan for another 22 months, but Verizon tells me it will not be upgraded beyond its current version of the OS (2.3), so it will become less and less capable over time.

The most attractive alternative to me is to move to Europe.
EVVJSK
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EVVJSK,
User Rank: Apprentice
3/12/2012 | 3:55:26 PM
re: Why Smartphone Subsidies Won't Die
The problem with the current system is that I pay too much for data (that is how they are recouping the cost of their subsidized phones), voice, and text. If I am happy with my 3 year old phone, but want a reduction in cost, I can't get it without dropping services. There SHOULD be a plan that allows lower cost plans if you take care of purchasing the phone yourself. T-mobile should lead the way in this as it is a way to differentiate themselves. They can still offer the subsidized plan if they want, but an unsubsidized cheaper plan should be an option.
herman_munster
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herman_munster,
User Rank: Apprentice
3/9/2012 | 8:30:54 PM
re: Why Smartphone Subsidies Won't Die
Maybe if people paid more for their smartphones, they'd get more out of them for a longer period of time.
lacertosus
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lacertosus,
User Rank: Apprentice
3/9/2012 | 6:10:37 PM
re: Why Smartphone Subsidies Won't Die
I honestly don't believe that phones cost that much. According to an article I read sometime ago, it costs Apple around $198 to manufacture an iPhone (parts, labor, shipping). To me, providers are turning huge profits over a two year contract by 'recovering' the supposed $600+ cost of the phone. Also, I can purchase a mid-grade Dell laptop for less than $600! Dell is not in the subsidies business and I'm not convinced that a smart phone costs more than a decent laptop with 250 GB hard drive.

Assuming the phones really cost $600 or more. In that case, wouldn't make more sense to manufacture these phones in the US rather than China? It would be much cheaper!

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