How carriers won the west – or, a brief history of subsidies

Books on a tablet

[Editor’s Note: This is a guest post brought to you by Cody Toombs. He commented on another blog with a shorter version of this post, and I reached out to him asking if he’d like to elaborate and appear as a guest poster on this blog. Thank you Cody for writing this beautiful post! -Aaron]

The United States is relatively unique in that it’s the only country where the vast majority of people don’t know how much their cell phones retail for. Almost everybody can tell you how much they paid when they signed the contract, but unless their phone meets an untimely demise, they will never see that this small gadget costs as much as their laptop. The low price comes at the cost of profoundly high monthly service. The rest of the world is baffled when we pay upwards of 500% more each month, but they don’t understand our addiction to subsidized phones. Why are we different and how did we get here?

Old cell phone and pager

“It began back in the days when cellphones were just becoming popular and pagers were slipping out of style.”

It began back in the days when cellphones were just becoming popular and pagers were slipping out of style. US cellular carriers, trying to create rules for a new market, desperately sought ways to acquire as many customers as they could, ultimately cannibalizing their profits to give signing bonuses. At first, those offers included terms of free service, discounted features or discounted phones. Since most people didn’t yet have phones and the cost of getting their first phone wasn’t trivial, the carriers saw it as a hurdle that prevented many potential customers. To lower that hurdle, the carriers offered to eat the price of new phones, simply asking customers to commit to a term of service to pay back the carrier’s investment. At first, the final cost to the customer was negligibly more, but they could spread it out over time and avoid the initial hit, much like they were used to with loans for other large of purchases. Thus began the cell contract and carrier locked phones.

"Blackberry Messenger rose as a trendy alternative to text messaging, driving the demand for data"

“Blackberry Messenger rose as a trendy alternative to text messaging, driving the demand for data”

Fast forward to the beginning of the smartphone revolution, spearheaded by Blackberry and Microsoft. The new demand was for cellular data, a feature that was expensive to build out but promised great profit margins. In this time, Blackberry Messenger rose as a trendy alternative to text messaging, driving the demand for data and for carriers who could offer Blackberry Services. The divide between two business models started to grow, prepaid carriers still competing on monthly price, while postpaid carriers offered the most exciting new features with a handy contract to get the latest gadget at a low price for a bit more each month. While Blackberry was responsible for millions of contracts, the launch of the Apple iPhone saw an explosion of contracts on AT&T and almost instantly the average bill ballooned to $100.

These events brought us to where we are today. The average monthly bill is higher than most utility bills and most people feel they are stuck with their phones for the next 2 years, even though technology quickly leaves them behind. Why are we still here? Mobile Virtual Network Operators (MVNOs) like Straight Talk offer prepaid pricing and structure while serving nationwide coverage. Regional carriers and startups are lowering their prices and operating on razor-thin margins to attract new customers. Carrier restricted features like Blackberry Services have gone the way of the dodo, and carrier exclusives mean nothing to somebody who is willing to order an unlocked international version. When the monthly bill is so high, why don’t people just leave?

When the monthly bill is so high, why don’t people just leave?

There are four common reasons people aren’t ditching their contracts yet. The first, quite frankly, has everything to do with the American inability to manage money. How else can we explain the mortgage crisis and sub-prime loans? When a regular person sees the full price of a decent phone, sticker-shock sets in and they run back to the pleasant feeling of a subsidy. The second issue originated with the nightmarish nickel-and-diming most customers experienced with bad prepaid carriers of the past. The third problem is tied to the social stigma, best summed up by a quote from somebody I knew, that prepaid service is for “poor people and drug dealers”. Surely it’s a bad line of thinking, but that perception isn’t uncommon and needs to be solved with better marketing. The fourth reason is the easiest: people are lazy. Many aren’t interested in taking the time calculate the costs, and most don’t care to change.

LTE is the new battleground between prepaid and contract carriers. Prepaid carriers that own and operate their own networks are far behind on LTE, and none of the MVNOs have been able to strike a deal to put their customers onto a national carrier’s LTE towers. For the next couple of years, LTE in the US will require a contract. Once you’re signed up and paying the higher price, the subsidy becomes a meager saving grace and the only way to rationalize the cost.

Subsidies have become so entrenched in American psychology, many Americans have forgotten prepaid service is even an option. A few things are changing the landscape, particularly CyanogenMod for keeping old Android-based phones in useful condition beyond the lifetime of a contract. Google’s Nexus 4, a top-tier device for a great price, has also prompted some consumers to ask if higher contract prices and bloatware on their new phone are worth it. The future is unpredictable, but the next few years will surely see some major competition in the market.

Photo credits (in order of appearance):

Cody Toombs

Cody is a Software Engineer and Writer with a mildly overwhelming obsession with smartphones and the mobile world. He always has something to say and usually has to hold himself back from writing even more. If he’s been ripped away from the computer, you can usually find him talking about cocktails and movies, sometimes resulting in the consumption of both.

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About Aaron Burke

I’m just one guy on the internet who’s come about this knowledge of prepaid phone plans from various sources and become empassioned enough about it that I feel like it should be shared with everyone in one easy to find place. It is my goal to provide you with the information and the tools you need to make an informed decision in the easiest way possible. IF you find my information helpful and you make the switch to a prepaid phone plan, I do have referral links which throw a monetary kickback in my direction if you sign up, and I’d appreciate if you use them – but if you don’t, that’s fine too. My goal is education, not monetization. There are no lies, no marketing spin, no abstractions of the truth, and no fine print to be found here.
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2 Responses to How carriers won the west – or, a brief history of subsidies

  1. Sinnary Sam says:

    It is crazy to see that these tiny little contraptions cost more than a good PC. And, I do believe because the prices are inflated for the purpose of promoting free and discounted phones tied to service contracts.

    • Aaron Burke says:

      I wouldn’t say they’re inflated any more than any other consumer electronic device. Of course it’s not being sold at cost – the manufacturer needs to make profit too – but many times, the manufacturer isn’t making as large of a profit as you might think. Remember that when you buy a given good, you’re not just paying for the materials and the labor to put it together. You’re also paying for the R&D it required to get the device to market in the first place. I used to do embedded software development, and I can confirm that it takes a LOT of R&D, both on the hardware and software front, to create a functional device worth selling, not to mention the costs for regulatory approvals of the near-finished device via agencies like the FCC.

      And before it’s brought up, I know a lot of people cite Google’s recent Nexus 4 / Nexus 7 as a prime example of pricing cheaply, but with those devices, Google is operating on razor-thin margins (and sometimes at a loss) because selling the hardware isn’t their source of income. They make their money by selling advertising and through Play Store purchases. Other manufacturers (Samsung, HTC, Asus, Sony, Motorola, etc.) don’t have that alternative income.

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