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Cellphones Businesses Handhelds The Almighty Buck

Really, Why Are Smartphones Still Tied To Contracts? 482

Bennett Haselton writes: "It's not trivial to explain why cell phone companies find it profitable to sell phones at a deep up-front discount and make it back over a two-year contract. Why don't other companies sell similarly-priced goods the same way? (And why, for that matter, has T-Mobile found it more profitable to do the opposite, selling the phone and the service separately?) I'm trying to come up with an explanation that makes realistic and consistent assumptions about the stupidity of the buying public, and still makes sense." Read on for the rest of Bennett's thoughts.

Matthew Yglesias at Slate wrote a year and a half ago about T-Mobile up-ending the cell phone industry by starting to sell phones and phone service separately. Yglesias wrote about the prevailing cell phone business model up to that point:

The customer walks out thrilled with the deal he got on his phone. Only later, when his ridiculous, complicated, and obscenely high bill comes, does he realize he has been fleeced.
The subsidy model is basically a scam, but it only arose thanks to our own collective mental failings. A phone-buying public used to getting high-end devices for $200 or $300 may simply balk at the discovery that a pocket-sized computer’s actual price is twice that or more. Until now, limited competition in the industry has let us optimistically believe that the American phone-buying public is the victim of unscrupulous business practices. But if T-Mobile can’t make this work, the lesson will be that the real fault lies with ourselves.

I always thought the underlying question was more complicated than that. First of all, if customers really realized that they had been "fleeced" after the first of their 24 monthly bills came in, that scam should only work on a particular customer for... two years, and then they would be wiser the second time around. But plenty of users stay with Verizon and AT&T year after year, getting new free phone "upgrades" that lock them into extended contracts. And besides, are so many phone buyers really that dumb, that they would take a "free" phone while entering into a two-year recurring billing contract, without thinking about how much that would commit them to paying in the long run? This is why I think that explanation doesn't meet the criteria of making realistic assumptions about how easy it is to fool the public.

Or if you think people really are that gullible, then the obvious question is why that tactic doesn't work for other products sold just a few feet away at the same Best Buy. While cars and other big-ticket items are often advertised for "No money down and just 24 monthly payments of $X", the vast majority of laptops and other expensive consumer goods are simply advertised with their sale price, and if you want to pay for them in installments, you can work that out at the time of purchase. If consumers are really dumb enough to be swindled into overpaying for their cell phones over two years, why aren't laptops and other items advertised in terms of two-year monthly payment contracts? This explanation makes inconsistent assumptions about how dumb we are.

And it can't be as simple as "Some people don't have the money to pay for the phone up front," because most places you enter into a cell phone service contract, will also let you buy the phone outright and set up an installment plan to pay it off (which of course is basically the same thing as paying it off over your two-year contract). You have to get a credit check to get on an installment plan, but you have to get a credit check to get on a cell service contract too. So that can't be the complete explanation either.

And then there's the twin mystery of why T-Mobile finds it profitable to do the opposite and avoid contracts entirely. This, at least, has a plausible explanation -- T-Mobile, with the smallest coverage area of the major cell providers, was looking for a way to differentiate itself from competitors that didn't involve slashing prices in proportion to their smaller coverage. So their phones don't work out in the boonies, but you know exactly what you're paying for when you buy the phone, and when you buy the service plan.

But why does everyone else continue to sell phones on contracts? Why do we still fall for it? And why don't the same tricks work for other expensive electronic goods?

The best explanation I've heard so far involves a combination of the following:

  • Cell phones, unlike cars and laptops, don't look like they should cost as much as they do. (Electronics engineers know that of course it's harder and more expensive to fit fancy circuitry into a smaller space, but regular phone buyers instinctively think smaller should be cheaper.) So people would instinctively balk at the sticker price of a smartphone, even if it were payable in installments so they didn't have to have the cash up front. As a result, they pay instead through a more expensive service contract, even though the total ends up being more than if they had just bought the phone and paid in installments.
  • Cell phones, unlike cars and laptops, are only useful when tied to recurring purchases of another product, the cell phone service plan. This presents an opportunity to confuse buyers who have no idea how much that service plan should actually cost, so they don't realize how much the service plan fee has been inflated to cover the cost of the phone. A laptop, by contrast, may only be useful when connected to the Internet, but there isn't a one-to-one pairing of laptops with Internet service contracts because multiple laptops in the same household usually share the same WiFi bill. And all cars require gas, but it would be hard to sell someone a cheap subsidized car and then require them to buy all of their gas from one overpriced vendor for the next two years.

These explanations are at least internally consistent, so they could be true. Who knows if they actually are true. Can you think of others?

The good news is that other cell phone companies are catching on: When I called the local AT&T store to ask if they had any "free" phones that came with a two-year contract, the salesman immediately steered me towards purchasing the phone and the plan separately, T-Mobile-style, saying it was cheaper. He said I could get a Nokia 920 for free with a two-year contract to pay $40/month, or I could buy the phone outright and pay it off in installments of $11/month, while meanwhile using the service plan for $25/month, for a lower combined price of $36/month. The local Verizon store said I could get the latest Droid for free with a 2-year contract paying $75/month, or I could pay the phone off in installments of $16/month while getting a discounted non-contract service plan for $65/month. So Verizon in this case doesn't actually make it cheaper to buy the phone outright and pay it off in installments, but at least it's a step in the right direction. (When I bought a phone from Verizon two years ago, they didn't offer any discount on their monthly service plan even if you bought the device outright. It has always been possible to buy cell phones at a full retail price, but of course it didn't make sense unless you would get a corresponding discount on the service plan.)

So this is good news, but it makes the relevant question even more difficult: Why is it that cell phone companies previously found it profitable only to sell phones on contracts, and now find it profitable to move slightly in the opposite direction? With any luck, soon the question will be a historic one: "How come cell phone companies used to confuse us about what we were really paying for our cell phones, and why did we put up with it?"

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Really, Why Are Smartphones Still Tied To Contracts?

Comments Filter:
  • That's easy (Score:5, Insightful)

    by Anonymous Coward on Thursday May 01, 2014 @01:43PM (#46891087)

    Because telecom markets are monopolized (or at a minimum, duapolized), and it is precisely that level of control which allows them engage in predatory business practices.

  • Your Blog Sucks (Score:4, Insightful)

    by Anonymous Coward on Thursday May 01, 2014 @01:46PM (#46891145)

    Your Blog Sucks

  • Sure you can. (Score:5, Insightful)

    by CronoCloud ( 590650 ) <> on Thursday May 01, 2014 @01:49PM (#46891215)

    You can most certainly get a smartphone without a contract, even as pay as you go. BH hasn't been paying attention.

  • Lease? (Score:5, Insightful)

    by SuperKendall ( 25149 ) on Thursday May 01, 2014 @01:50PM (#46891231)

    I would argue that leasing a car is not unlike a phone contract, you get access to a way more valuable car for a period of time than the equivalent payment would get you.

    Not that you get to keep the car after, but some people just go from lease to lease the way you describe going from phone to phone.

  • Seriously? (Score:5, Insightful)

    by dos1 ( 2950945 ) on Thursday May 01, 2014 @01:51PM (#46891241)

    Uhmm, are they? I never bought any smartphone on contract with operator. The last phone I bought like that was a standard dumb phone many years ago.

    Of course there are offers like that, but saying that "smartphones are tied to contracts" is bullshit. You just buy a phone, put SIM in and you're ready to go. If you're doing it in different way, that's your problem.

  • Its like this... (Score:5, Insightful)

    by JustNiz ( 692889 ) on Thursday May 01, 2014 @01:54PM (#46891303)

    Its like the story of the 2 bakers that had stores next door to each other, so were both not making much money.
    One put his prices up, the other put his prices down.
    Guess which one survived?

    AT&T is the short-sighted baker who is still trying to charge you $10 for a loaf of bread and lock you into only doing business with them, because to do so makes them more money per customer.

    T-Mobile has broken ranks with the price-fixing collusion of the big carriers, and are now trying to charge a fairer price and not lock people in, on the basis that Americans aren't actually stupid so will switch to a better deal. Honestly I'm not as sure as they apparently are about that one. T-mobile now make less money per customer, but are gambling on ending up with way more customers and it being a net win.
    I hope T-Mobile are proved righ and do win because companies like AT&T badly need to be given a black eye for their sleazy price gouging and nickel-and-diming practices.

  • by T.E.D. ( 34228 ) on Thursday May 01, 2014 @01:57PM (#46891341)

    If I had to pay the up-front $700 cost of the latest-greatest smartphone, I'd never do it. When it's only $200, I can generally scrape that together.

    Tied plans are hiding the true costs of the smartphones Americans buy, which is encouraging high-end sales. We all essentially have our next phone on layaway.

  • by the_humeister ( 922869 ) on Thursday May 01, 2014 @01:57PM (#46891347)

    I bought my Nexus 4 for $199 last year. It's unlocked with no contract. Went to Taiwan last year and just had to buy a 1 week data SIM. Now my phone was the WIFI hotspot for my family, who all had carrier locked devices.

  • by Anonymous Coward on Thursday May 01, 2014 @02:01PM (#46891403)

    ...and more importantly why should I care about his random "thoughts" of the day?
    How does this crap get on the front page anyways?

  • Fuck Timmy (Score:4, Insightful)

    by Jmc23 ( 2353706 ) on Thursday May 01, 2014 @02:03PM (#46891433) Journal
    and his bitch boytoy Benny.

    Seriously, what is he twelve and never heard of any countries besides the USA.

  • Get this off /. (Score:5, Insightful)

    by alta ( 1263 ) on Thursday May 01, 2014 @02:07PM (#46891487) Homepage Journal

    First, this article is stupid and made more dumber for reading it.

    Secondly, people like to finance everything. You're just financing your phone. It just makes it a little more complicated that it's hidden in a monthly service. It's that simple. Doesn't need a story. Can we un-post this?

  • tl;dr (Score:5, Insightful)

    by sootman ( 158191 ) on Thursday May 01, 2014 @02:08PM (#46891491) Homepage Journal

    Short version: "Bennett Haselton writes 1300 words on something that has been hashed to death a million times already."


    Seriously, what is this shit doing on Slashdot?

  • Blog (Score:5, Insightful)

    by Anonymous Coward on Thursday May 01, 2014 @02:10PM (#46891511)

    It's official, Slashdot has become Bennet Hasselton's personal blog.

  • Re:That's easy (Score:5, Insightful)

    by ShanghaiBill ( 739463 ) on Thursday May 01, 2014 @02:10PM (#46891521)

    Because telecom markets are monopolized

    I don't think that is the reason at all. I have always used no-contract pre-paid phone service. I save money, with no strings attached. There are good choices for anyone who cares, but most people choose the dumb option. Why? Beats me. The problem is that most of the people signing up for these contracts, are also eligible to vote, leading directly to our $17 trillion national debt.

  • by shitzu ( 931108 ) on Thursday May 01, 2014 @02:14PM (#46891577)

    The point is that they pay twice the price of the phone this way. If you find it convenient to pay double for phone as well as contract - by all means, do that.

  • Re:That's easy (Score:4, Insightful)

    by Andy Dodd ( 701 ) <{atd7} {at} {}> on Thursday May 01, 2014 @02:19PM (#46891647) Homepage

    It was impossible to do this until the past 2-3 years.

    Straight Talk's MVNO plans were the first time anyone could get GSM service that was BYOD-friendly, and ST's SIMs disappeared in early 2012 or so for over a year. Also, you could only get their SIMs online so few people knew about them.

    T-Mo was the first provider to offer plans without a subsidy penalty, but they're not an option for many people because their network is so small. Although their 200MB/month "promotional free data" plan is one of the smartest marketing ideas in history. 200MB/mo leads to very little load on their network, but allows people in rural areas to monitor the reality of T-Mobile's services. (e.g. I'll know thanks to my Chromebook once they start offering more than just EDGE service in my area.)

    Sprint and Verizon aren't feasible for BYOD due to being CDMA2000-based. That's starting to change slowly (the Nexus 5 was groundbreaking in this regard) but still they have a stranglehold on device compatibility.

    AT&T does give any reasonable BYOD discounts unless you're on a family plan with lots of lines. (Their BYOD discount combined with an applicable plan is more expensive than their individual plans)

    So contract-subsidized phones are taking forever to go away thanks to the carrier monopoly and a bit due to culture. People are stupid, and seeing a $1 phone throws them into a frenzy even if you show them the math that shows that they're paying so much more for service that the phone will cost them $200-300 more over 2 years than a cheaper no-subsidy plan and buying a device outright.

  • by Jason Levine ( 196982 ) on Thursday May 01, 2014 @02:19PM (#46891649) Homepage

    But in this case, cell phone companies could arrange payment plans and keep the service separate. Say the phone costs $700. You pay nothing now and pay $30 a month for 2 years. On top of that, you pay for your month-to-month service. Now suppose in month 5 you decide you want to go with Other Cell Phone Company instead. You cancel your service, but will still pay your initial cell phone company $30 a month until your phone is paid off (or unless you pay off the amount remaining). As for the risk of the person just refusing to pay that bill, that's what collection agencies are for.

    The real reason for contracts is to make sure that customers can only jump ship once every 2 years. This lowers "I've had a bad experience, I'm leaving" churn as the customers might have forgotten about it by the time their contract is up.

  • Really! (Score:3, Insightful)

    by Anonymous Coward on Thursday May 01, 2014 @02:20PM (#46891661)
    Really, Why Are Bennett Haselton Articles Still Being Posted?
  • Mystery solved (Score:2, Insightful)

    by Anonymous Coward on Thursday May 01, 2014 @02:24PM (#46891727)

    After 2 years on contract my plan does not go down by the rent price of the device. So I have no incentive to keep paying the high price without getting a new device. At least this is how it worked until very recently.

  • by gstoddart ( 321705 ) on Thursday May 01, 2014 @02:26PM (#46891763) Homepage

    I'm trying to come up with an explanation that makes realistic and consistent assumptions about the stupidity of the buying public, and still makes sense

    For years, companies (and even some government entities) basically kept saying "can't afford something, no problem, finance it". Which is fundamentally what caused the meltdown in '08 -- too much borrowing, and financial institutions giving out credit like candy to people who couldn't pay it back.

    People have been conditioned to believe that their wants are in fact needs.

    Can't afford that $700 smart phone? No problem, get it on credit. Can't afford the new sofa for your house? No interest no payments. Can't afford that new house? We'll give you a mortgage anyway.

    When your buying public doesn't really understand credit, and when everybody "needs" to have the latest and greatest thing, the lure of convenient monthly payments (which you may still not be able to afford) solves your problem.

    If the average America [] has $15K in credit card debt, you seriously have to ask why people buy their phones on an extended contract?

    Seriously, you're trying to find the answer to a far broader issue than just cell phones.

  • by Anonymous Coward on Thursday May 01, 2014 @02:36PM (#46891903)

    The analogy that I've long used is that Verizon is the hottest girl at the prom, and worse, she knows it.

    That's why competition is so important. It's not just that Verizon is the hottest girl at the prom, it's that there's only 4 girls at the prom, 2 of them really aren't interested in being there, and the other 2 aren't really that hot or nice but there's no one else there. Meanwhile, the chaperones are keeping out oodles of much more deserving, attractive girls who want to be at prom but are forbidden because of idiot authoritarian parent council leaders, who maintain the status quo because Verizon is flirting with them.

    Honestly, people take these contracts because they're gambling they won't leave after 2 years. And if they renew their contract, they obviously were right.

  • by briancox2 ( 2417470 ) on Thursday May 01, 2014 @03:06PM (#46892279) Homepage Journal
    -1 Troll?

    I wish I had a mod point to spare you, my friend. Except someone taking offense at your language, you make a great point. (Ironically, Bennet is very much pro-f-word [].)

    Every couple of weeks, Bennet Haselton has an idea, and much like Hugo Chavez, he feels that he and we have a duty to get into a lengthy discussion about his ideas on the matter. And who is he? He's a guy that started some once controversial websites and promotes internet freedom. So do I, by the way, though I don't make it my full time job. Are his ideas brighter and more wise than mine or yours? I can't say they are when he calls T-Mobile profitable.

    But, apparently, timothy thinks his ideas are so important that normal Slashdot story excerpt length needs to be set aside any time he has something to say. So why should it be "Troll" behavior to question why his ideas are heralded while the ideas of most others can only earn a dominance of Score:5 at most? I think that's very relevant discussion on this thread. I M H O.
  • Re:Seriously? (Score:4, Insightful)

    by afidel ( 530433 ) on Thursday May 01, 2014 @03:55PM (#46892951)

    You CAN take it to Sprint or AT&T, but you'll pay the same monthly charge as someone who didn't bring their own device (ie paying a monthly subsidy for a phone you didn't receive), there are sometimes exceptions, but in general that's how it works.

  • Re:Momentum (Score:4, Insightful)

    by nblender ( 741424 ) on Thursday May 01, 2014 @04:31PM (#46893335)

    I've been in the telecom business but not the marketing end... I don't know about now but back then, the model was that phones were expected to last 18 months before the battery or something else gave out... So you wanted your customer to renew and tie in to a new 2 year contract when they were almost finished their current contract and prevent them from moving to another carrier.

The next person to mention spaghetti stacks to me is going to have his head knocked off. -- Bill Conrad