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Another Wireless Carrier Starts to Hang Up On Subsidized Phone Prices

· December 6, 2013

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Starting Sunday, phone prices will look a little less fake in the U.S. That’s when AT&T will follow the lead of its competitor T-Mobile in offering lower prices to subscribers who bring their own phones to the carrier—and giving existing subscribers a discount if they keep their old devices once they conclude their contracts.

AT&T’s announcement of this new Mobile Share Value option on Thursday came almost a year after its far smaller rival announced that it would scrap traditional subsidized phone pricing entirely.

You could easily forgive T-Mobile for gambling on blowing up its business model in late 2012: It was the fourth carrier in what often looked like a two-carrier market. AT&T, however, is not only the second-largest carrier in the U.S. after Verizon Wireless but the company that two years ago counted on buying T-Mobile.

But T-Mo’s seemingly foolish move to give up the easy money of service charges inflated to recoup subsidies on phone prices—a loan subscribers could only close out by buying a new phone and restarting the cycle—is working. The carrier grew faster than AT&T and Sprint in its last quarter, adding more than 600,000 postpaid users while narrowing its losses.

(Disclosure: T-Mobile is a member of the Computer & Communications Industry Association, the Washington trade group that hosts this blog. So is Sprint.)

AT&T hasn’t exactly matched its smaller competitor’s pricing. The $15/month discount it offers if you bring your own phone can turn into a money-loser relative to its subsidized prices if you need one of the latest phones it sells—though perhaps not if you travel overseas and can avoid AT&T’s roaming rates by using prepaid service in other countries.

But what if you buy a phone that’s not in AT&T’s inventory at all? At worst, you’re punished less for picking a higher-priced device like the $599 Google Play Edition of the HTC One; at best, your savings from choosing a cheaper model like the $179 Moto G (or a used phone bought off eBay) increase considerably.

That, in turn, makes it a little more rewarding for phone manufacturers to design more affordable phones and sell them directly to consumers—eroding a fundamental form of market distortion.

Now consider how AT&T can market itself against Verizon and Sprint and how those two might respond. In this context, AT&T cutting subscribers a break for keeping their old phones after their two years are up looks like the more interesting move; Verizon in particular, already a pricey choice, will look even more expensive.

If either VzW or Sprint offer any sort of comparable discount to users who bring or keep their own hardware, that’s unlikely to encourage manufacturers to sell CDMA phones direct to customers. That system, unlike the GSM standard employed by AT&T, T-Mobile and most of the rest of the world, doesn’t keep a phone’s subscription status in a removable card that you could buy separately and pop into any suitable phone—which means that a CDMA carrier can still refuse service to a compatible device.

(LTE does allow that level of portability, but carriers can find other ways to refuse service; witness media critic Jeff Jarvis’s futile attempts to add a Nexus 7 tablet to his Verizon multiple-device plan at Verizon’s advertised rate. We will have to see if the Obama administration’s recent endorsements of hardware portability, including new FCC chairman Tom Wheeler’s advocacy, discourage that sort of control-freakery.)

Such a move would, however, make the vast installed base of older phones more viable competition against new models. When keeping what you’ve got or buying something used saves you money every month, manufacturers may have to find a sales pitch more persuasive than “we put more pixels on this thing’s screen than you can possibly see.” 

So: more honest pricing on hardware, lower rates for service, less carrier interference in phone procurement, and a little more competition among handset vendors. I’d say they add up to a pretty good reward for the Feds declining what had become a frequent response to a mega-merger—negotiating conditions on the new entity’s conduct that then get diluted to irrelevance through the usual regulatory-capture playbook—and instead reacquainting themselves with a simpler response: no.

Competition

Some, if not all of society’s most useful innovations are the byproduct of competition. In fact, although it may sound counterintuitive, innovation often flourishes when an incumbent is threatened by a new entrant because the threat of losing users to the competition drives product improvement. The Internet and the products and companies it has enabled are no exception; companies need to constantly stay on their toes, as the next startup is ready to knock them down with a better product.