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Maybe $500 Isn't Too Much For A Phone, After All

If you've ever broken your phone at a time when you're not eligible for the subsidized price, you quickly realize that phones cost a lot more than the zero to $100.00 that most people spend on them. An NTT DoCoMo board member recently recommended that his company follow South Korea's recent move away from subsidies, meaning c
If you've ever broken your phone at a time when you're not eligible for the subsidized price, you quickly realize that phones cost a lot more than the zero to $100.00 that most people spend on them. An NTT DoCoMo board member recently recommended that his company follow South Korea's recent move away from subsidies, meaning customers will have to pay more for their phones up front. Are Americans prepared to pay hundreds of dollars for devices they expect to receive for free?The answer is, they might have to.

A quick survey of my wireless carrier's Web site showed me that the least-expensive full retail price for a handset is $139 for the lowest-end phones. Prices quickly jump to $200 and $300 for midrange handsets. Full-featured smartphones go for $400 or $500.

Similar to the U.S. market, the Japanese wireless network operators heavily subsidize the cost of handsets. The operators recoup some of the cost of the phone over the life of the contract for each customer, as they do here. Even so, the expense to the network operators in Japan can be as high as $468 per handset. Multiply that by the 50 million new handsets bought in Japan every year and you begin to see just how pricey this model is.

Japanese government groups and even the head of strategy for Japan's largest wireless carrier, NTT DoCoMo, believe this model hurts the carriers too much and needs to be changed. South Korean network operators also used to subsidize handsets but have moved away from that model. European network operators subsidize handsets minimally, if at all.

Part of the reason this model exists is competition to sign up new customers. People are simply more willing to purchase handsets at lower prices, no matter the overall contract costs. For the fully saturated Japanese market, this no longer makes sense. The same will be true in the U.S. market before long, which is 77.8% saturated.

Though NTT DoCoMo's Noriaki Ito cautions that a move to full retail prices would wreak havoc on the handset business, he suggests a hybrid approach be taken instead. The hybrid plan would call for an upfront payment on the device, like a downpayment on a car, and then a monthly installment charge on each bill until the phone is paid off.

Whether or not such a move is successful in Japan is hard to foretell. But if Japan does switch to such a model, it won't be terribly long before the U.S. carriers begin to rethink their models as well.

When full retail prices are considered, suddenly that $500 price tag on the iPhone isn't all that high.