The Pros And Cons For Consumers Of Ending Wireless Phone Subsidies

While many overseas wireless providers choose to not subsidize customers’ new phone purchases in exchange for locking the consumer into a contract, it’s still the prevailing model among three of the four major wireless companies here in the U.S., with T-Mobile the sole provider offering only non-contract plans (sort of). But with AT&T recently dipping its toes into the water to encourage customers to buy their own phones, the market may be in for a major change.

We’ve argued for years that wireless companies should do away entirely with phone subsidies, or at least do what AT&T is offering — dropping monthly rates for those who own their phones outright. But unlike those international wireless customers who are used to paying full price for their phones — often several times the subsidized cost to the consumer — it may get a bit ugly making the switch to unsubsidized phones here in the states.

A top of the line smartphone with a new two-year contract will currently run most wireless customers around $200, only about 1/3 of what they would pay for that phone without the subsidy.

If all the major wireless companies were to ditch subsidies, one would hope that device manufacturers would eventually drop their sticker prices on these devices in order to keep consumers buying phones. Many people have no problem paying a couple hundred bucks every two years and either re-upping with their current provider or trying out a new company, but will that level of turnover continue if these same consumers have to pay $650 when they want a new phone?

T-Mobile has tried to minimize the sting of those high prices by allowing customers to pay for their unsubsidized plans via monthly installments without financing charges. While that has the effect of making these phones more purchasable — the customer doesn’t need to go out of pocket for the full price right away — it does nothing to actually drop the price of the phones.

If the other providers follow T-Mobile’s lead and replace subsidies with installment plans — which wouldn’t shock us, as all of their recently launched early upgrade plans work this way — wireless manufacturers would still be able to charge sky-high prices to consumers, rather than being forced to compete against each other with lower prices. But, as I discuss below, that may be the price we have to pay.

Consumers’ rapid adoption of smartphone technology has spurred a remarkable level of innovation in what is still a relatively new technology. This has been aided by the ability to switch up to a new phone every 20-24 months, resulting in a continuous flow of improved-upon products. How would this be impacted by the removal of subsidies? Again, it will likely come down to how wireless companies get rid of the subsidies.

While just removing them outright and forcing consumers to pay full-price right away for a phone would like result in better price competition, it may also stanch the flow of new products. If someone suddenly finds out that the new version of the phone they’ve been using for two years will suddenly cost him 3-5 times what he paid, and he’s got to pay the whole price up front, he may delay making that purchase or switch to a cheaper option.

If that device is available to purchase through an installment plan, however, the high sticker price won’t be as much of a put-off, and he may very well be willing to re-up those installment payments on the next phone after 24 months. If so, then the turnover of devices may remain relatively unchanged.

One of the main reasons to push for the end of subsidies is that it should result in lower wireless subscription rates for consumers. T-Mobile dropped its rates to reflect the lack of subsidized devices and AT&T’s rates are now $15/month lower for people who own their phones.

While lower rates are always welcome, consumers need to be wary of wireless providers using these lower rates as an excuse to slowly raise prices back to where they were before. Sure, the provider drops rates $15 bucks now, but that will gradually increase over time, and many consumers won’t notice or put up too much of a fuss because the rates will still be less than they are currently paying.

“You’re looking at what is likely to be a lower price, less profitable wireless industry in the future as a result,” one analyst tells the L.A. Times. “Service and device are being unbundled, and the consumer gains transparency in the process.”

While I agree with the idea that subsidies are on the way out and this is a good thing for consumers in the long run, I also think the analyst is being a little too optimistic about the wireless industry’s transparent, less-profitable future, and that they will continue finding ways to chisel away out our wallets with unnecessary fees and charges. Here’s hoping they prove me wrong.

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