As many of you know, I have a tendency to fall back on automotive metaphors when trying to describe the mobile industry. What can I say? Cars are familiar and relatable.
So imagine this: you walk into your local dealer (for the purposes of this analogy, said dealer sells all brands — stay with me). You're offered a brand new 2012 BMW M3 and a 2013 Volkswagen Polo for exactly the same price. Which do you choose?
The BMW, of course. It doesn't matter that it's a year older. It's a better, higher-end car with more features.
So why is it that American wireless carriers continually flout this natural order of economics with virtually every new phone they release?
The launch of Nokia's mediocre Lumia 822 on Verizon most recently brought this phenomenon to my attention. As I was reviewing it, I thought, "who in the world should spend $49.99 and sign a two-year contract for this?" The answer, in practical terms, is no one. Not just because it's not a stellar phone, but because you can get the superior Droid RAZR M or the Droid Incredible 4G LTE for the same price. You can also get an iPhone 4 — still a standard-setting smartphone even today — for free. And if you're specifically in the market for a Windows Phone, I'd bet a dollar that the superior HTC 8X is under $100 within a few weeks. Subsidized, on-contract sticker prices on these phones fluctuate with the frenetic unpredictability of the stock market.
The reason, in part, is that phone models are still being updated and replaced at an unprecedented pace that simply isn't sustainable. Even OEMs that have made a conscientious effort to slow their update cycles and reduce the number of models in their portfolios at any given time are failing: take HTC, for instance, which refreshed the One X with the One X+ just seven months later. Nokia did the same with the Lumia 900 and 920.
Seven months is not a reasonable life cycle for any durable product. You wouldn't buy a new TV, game console, Blu-ray player, refrigerator, or car every seven months. In fact, if a manufacturer discontinued and replaced your TV after seven months, you'd be pissed. But it's like an addiction: carriers and OEMs need the high they get from the fleeting sales bump after the release of an incrementally new model, a bump that quickly flatlines. Hilarious price adjustments ensue; a $199.99 phone falls to $149.99, $99.99, $49.99, and eventually free over the course of a single year.
And that leads to a traffic jam of phones and price points. High-end models that commanded $200 on contract just a few short months ago must be slashed to make room in the lineup for a new flagship. $50 phones become free. There's no room for free phones to be discounted, and inventory needs to be cleared. Suddenly, a $99.99 One X is going up against a $199.99 Galaxy S III on AT&T, two phones that were designed from the start to go head-to-head.
The basic laws of supply and demand start to break down. That's how you end up with your choice of a 2012 BMW or a 2013 Volkswagen for the same price. You'd scratch your head at the car dealer, and you should be scratching your head in the Verizon store.
This industry is eating itself alive, and these nonsensical prices are an early warning sign. Carriers urgently need to incentivize OEMs to slow down, not speed up. While Apple — and to some extent, Samsung — stay even-keeled with a single flagship phone per year, the rest of the industry is still chasing its collective tail, confusing customers, and leaving a mess of the store shelves.
Comments
read the analogy backwards you did.
By dangerdoc on 12.20.12 10:52am
Right on the money Chris!
By Spart325 on 12.20.12 10:03am
Oh god, he criticized a mediocre Windows Phone! Incoming!
By Bob1976 on 12.20.12 10:22am
I’ve never understood why the 2 year old HTC Trophy is $179 on Verizon, while the brand new 8X is $199 also on Verizon.
By smiden on 12.20.12 10:37am
I wonder if that’s why the Nexus 4 can’t stay in stock. $299, no contract. Seems like a perfectly normal price to me, not like the $700 I paid for a Nokia N82.
By jacobbarlow on 12.20.12 11:06am
Unsubsidized phone plans would allow the phones to be sold at their actual market value, not some arbitrary value the phone carrier assigns to them.
By WasAPasserBy on 12.20.12 12:28pm
Phone carriers set the price at the price they feel they will sell. If they don’t sell, they reduce the price.. I’ve never seen them increase the price when they sell too well, but maybe they should to reduce the shortages of some of these phones (Nexus 4).
By bglick4 on 12.20.12 12:35pm
@bglick
Nope they don’t. Phone carriers in the USA set phone prices as high as they can to force consumers to buy 2 year contracts. If they sold the phones at a reasonable profit margin they would be encouraging consumers to buy the phone and use cheaper sevices.
By biobot on 12.20.12 2:26pm
what caper services mind-bolingly there is no discount when you have an unsubsidized phone… which makes you wonder why they subsidize phones.
By Todrick on 12.20.12 3:27pm
This site needs an edit button!
Corrected post:
What cheaper services?
Mind-bogglingly there is no discount when you have an unsubsidized phone… which makes you wonder why they subsidize phones.
By Todrick on 12.20.12 3:28pm
That’s only true for the CDMA carriers. Going unsubsidised on T-Mobile or AT&T (stuff like Straight Talk, too) is substantially cheaper.
By Dork Thirty on 12.20.12 4:13pm
The fact that there is no discount for off-contract service in America is very much intentional. The carriers WANT us locked into 2 year cycles because dependability is better for business. They also know Americans will balk at full unsubsidized prices which mean not only will they have higher churn rates they will sell fewer 650 dollar devices as opposed to 199 dollar subsidized ones. People might not get new phones every 2 years if they actually had to pay the real cost up front.
It is true that Virgin and Cricket offer much cheaper plans for their unsubsidized smartphones but as usual, you have to read the fine print (their coverage really sucks). Until you can convince Americans to look at the big picture cost of their devices as opposed to just the upfront costs, I’m not sure the unsubsidized model will ever take off in the US.
By minimalist on 12.20.12 4:35pm
Your analysis of prepaid carriers is not totally true.
Straight Talk uses AT&T’s network for their data. And reportedly T-Mobile is moving towards a plan where they offer cheaper services with unsubsidized phones, which you can pay for upfront and then get a cheaper monthly fee, or pay over the course of a contract and avoid the upfront cost, but have a higher monthly bill.
That’s the kind of plan I want.
By immabutz on 12.20.12 6:39pm
That’s what T-mobile offers right now (http://www.t-mobile.com/shop/Packages/ValuePackages.aspx) in addition to no-contract monthly plans.
What T-mobile is planning on doing next year is completely killing off the 2 year subsidized contract, leaving only no contract or unsubsidized plans.
By WasAPasserBy on 12.20.12 10:02pm
Straight Talk is an MVNO… just like Virgin Mobile, Cricket Wireless, Boost Mobile, etc. In other words they lease spectrum from the big carriers who can afford to erect towers.
But there is always a catch with MVNO’s… either their coverage is lacking or their phones are tired or they charge out the ass (like the ridiculous diamond encrusted Vertu). They save money by cutting corners somewhere. Other wise they could not afford to offer plans that undercut the national carriers.
By minimalist on 12.20.12 11:17pm
MVNOs that user Verizon and Sprint may have you locked down in due to the nature of those network’s technology.
However, my Straight Talk Galaxy Nexus on AT&T is just as fast as and has the same problems as if I were on AT&T postpaid for half the cost. I can live with the limit on my data use for cheaper service overall.
The money I’m saving is worth it to me. I really did cut my costs in have and the network is faster than the CSpire’s network which I left.
There is no way I’d ever sign another contract for cellular service just to get a $300 discount on a $600 phone and be required to pay $$2160 for 24 month.
By JayBeeZee on 12.21.12 6:14am
" I can live with the limit on my data use for cheaper service overall."
That is fine if it works for you of course. But it is still a limitation.
Truly unsubsidized plans would give you the exact same service as a subsidized customer without the subsidy tacked onto the service cost and without the contract. Which no US carrier that I know of is doing yet (even T-Mobile seems to be using a hybrid system whereby you are still locked into a contract even though you pay full price for your phone). MVNO’s will always be at a loss because they do not own their networks. Which means the only way they can afford to offer cheaper service while leasing towers from the majors is by limiting you usage in some way… either via data caps, or streaming limitations, or by not offering as good of coverage as the big guys.
By minimalist on 12.21.12 9:31am
In my case, I’m getting the same coverage as post paid so the fact that I’m limited on data useage is of no issue. My wifi is faster anyway. I hardly use the towers for YouTube. I never use towers for app updates or downloading things I can wait on until I get home or near wifi anyway.
I can unerstand people not wanting to be limited but if you want ‘unlimited’ you are going to have to with postpaid and if you are happy with that and it is worth paying twice the price then getting a subsidized phone makes sense.
If you don’t want to be locked down and can compromise, prepaid is the way to go.
No one has ever dropped your monthly rate because you brought your own equipment and are not on contract. The only way to ‘win’ in that situation is to find a plan at a rate that you are happy with and never upgrading via the carrier and paying full price for your phones from then on when the prices eventually go up or your plan is no longer offered.
No one can predict the exact future but I know what I’m paying every month and my use sage means I’m not paying for more than I’m actually going to use anyway.
Everyone should audit their use patterns for 3 months and see just how much data they actually use and when. That way they can see if it will be worth it for them to drop the plan the are on to save money or not.
By JayBeeZee on 12.22.12 1:08pm
I’m not talking about unlimited data. I’m talking abut smart phone voice text and data plans of the same caliber as ones from Verizon and AT&T with a lower price to reflect the lack of subsidy. Such a plan has never been offered in the US but is common in other parts of the world.
http://www.foxbusiness.com/technology/2012/05/22/are-carrier-subsidies-hurting-innovation-and-driving-up-mobile-phone-costs/
What MVNOs like Walmart and Virgin and Cricket wireless are offering is a step in the right direction but just not robust enough for my family and I to leave Verizon for just yet.
By minimalist on 12.23.12 10:54am
And until T-Mobile announces the details of their plans I remain unconvinced. Paying full price for my phone and also being locked into a 2 year contract does not sound like such a bargain to me.
By minimalist on 12.20.12 11:18pm
It’s not. Especially if you’re on AT&T.
By VoxMediaUser750143 on 12.21.12 2:55am
What T-Mobile is doing is basically what they’ve been doing since they started the value plan, you pay a portion of the phone upfront, normally about the same price as a normal subsidy would be, and then you have a small payment added onto your bill INTEREST FREE for 20 months. There’s nothing really confusing about it.
You still end up saving money on the value plan from all the other major carriers subsidy model. I personally I have no issue with using their Equipment Installment Plan, I used to to buy my Nexus 4, instead of waiting for it on the Play Store.
By gothdroid on 12.21.12 3:37am
So you are paying for your phone over time and are locked into a contract. Sure sounds like a subsidized system in all but name to me. They are jut breaking out the phone charge as a separate line item.
The whole point of an unsubsidized system is to be free of a contract and to pay lower service costs. T-Mobile may get the cheaper part but they have always been cheaper because of their network’s speed and coverage limitations, even with subsidies.
By minimalist on 12.21.12 9:38am
Use the preview button instead.
By JohannesZ on 12.20.12 11:14pm
Carriers do NOT subsidize phones. They allow buyers to amortize the costs through higher phone rates and guaranteed monthly expenditure over a two-year term. It is essentially a lease, not a subsidy.
There is no free lunch. Americans seem addicted to credit and living beyond their means. This pricing structure merely plays to that mindset.
By Scooterch on 12.21.12 7:03am