Are Customers Addicted to Handset Subsidies?
thelab.o2.com
thelab.o2.com
There are two hurdles that I see: First, the lack of cheap, available, unlocked phones. I can afford the upfront cost of a Nexus 4, but I know many relatives who cannot. Even so-called "dumb" phones run $100 or so and selection is extremely limited. Second, many professionals I talk to get their phone and service from their company. As we all know, corporations are slow to change especially when it comes to telecom (evidenced by the sheer number still issuing BB phones).
I see T-Mobile trying to address these hurdles by bringing a trusted brand to the no-contract/non-subsidized market. I hope it works out for them.
Also, T-Mobile still allow you to pay off the cost of your phone over the length of the contract, so people will still be able to get state-of-the-art phones for a low upfront cost.
I could imagine paying £250 for a Nexus 4 to keep for 2-3 years, but not £600 for an iPhone.
1) Pay a high cost for the phone up front in exchange for a lower monthly payment
2) Pay a higher monthly fee and receive a free (or much lower cost) phone upgrade every two years
To understand the attractiveness of #2 to consumers, we can look at the reasons for financing anything.
Financing allows us to spread out capital outlays in exchange for a finance premium. For many consumers, the attractiveness of financing is that they can get the product they want now, rather than later. Even for consumers who might be willing to delay a bit, there's the matter of planning. Planning takes effort, and the finance costs are an easy offset for them, because they perceive that their chances of successfully executing their savings plan is low.
There is also a price psychology issue. An unsubsidized smartphone can easily cost $600. That is not an insignificant one-time cash outlay. The simple price deterrent factor pushes consumers toward obscene, but ultimately bearable, finance terms.
The real "ignorance" comes in the fact that we don't have a clear method of separating out subsidy costs. Yes, we can look at MVNO's, but they fail the "all things being equal" test. That is to say, an MVNO is not an apples-to-apples comparison to a large network provider like Verizon or AT&T, both of which have more coverage with their fast networks.
We can't adequately separate subsidy costs with T-Mobile, because they don't differentiate between subsidy plans and non-subsidy plans. This means that if you bring your own device to T-Mobile, you're actually paying a subsidy penalty for everyone else's phone.
I think saying that consumers are addicted to subsidies is really just another way of saying that consumers are addicted to financing. This is definitely true of American consumers. I don't think we'll see a shift in the way consumers purchase cell phones without a broader shift in the way consumers pay for goods.
People want stuff they cannot afford, so they spend money they do not have, it costs them dearly. That's how the system works; not that I advocate it.
It takes considerable effort to get out of the cycle, especially for people in consumerist USA.
The way I look at it is: If they ask me for my social security number, then I am getting a loan, and so I do not go through with the transaction. For my prepaid phone I spent $250 for the phone, and I pay $19 monthly. No SSN required. For a phone plan, I would spend $0 (or whatever for a higher-end phone), sign a contract, provide my SSN, and pay monthly over at least 2 years.
He mentions that the no money up front phone is like buying the phone on a 38% APR. I think that's exactly how people in the UK look at it. If you don't want a fancy phone then quite a few places will give a PS3 or similar device instead, which you pay up over your contract. It's just an obfuscated credit purchase. I've even seen offers where they basically give you cash up front in return for your monthly fees.
Like he was our father, man.