Wednesday, January 9, 2013

The End Of Cell Phone Subsidies?

Wireless provider, T-Mobile has said recently that it is planning to do away with its phone subsidy model next year. At the moment, whenever a customer buys a cell phone from a wireless provider, they have the option to have the cost of the phone reduced greatly so long as they agree to a long-term contract. The cost of the subsidy is recouped by the wireless carrier as part of the long-term cost of that contract. T-Mobile ending the subsidy is a risky move. Will consumers accept the higher initial cost of purchasing a phone in favor of a lower monthly contract cost? Or will they drop T-Mobile for forcing customers to pay full price for phones? Of course, when one carrier makes a game changing move like that, all the rest of them are going to be watching. Lowell McAdam, CEO of Verizon Communication and AT&T Mobility CEO Ralph de la Vega both hinted that their companies could follow suit if the T-Mobile plan proves to be popular. I, for one, am all for ending subsidized pricing for cell phones.

The elimination of subsidized cell phones will lead to more affordable devices. Currently, most cell phone manufacturers are marketing to carriers rather than to the customer directly. Because the carriers are acting as cell phone re-sellers, they can saddle the devices with all kinds of bloatware and while masking the true cost of the phones. Also, older hardware often has its price artificially maintained by the carriers at launch level because they have already locked out the competition. Buying the phones directly from the manufacturer would allow for more reasonable rates for older phones simply due to increased competition in the marketplace.

Taking phones out of the hands of the carriers would force the likes of Verizon, T-Mobile and AT&T to compete with one another purely based upon their services. This sort of focused competition would lead to better contract pricing and improved service as the carriers will be forced to differentiate themselves based upon quality of service, data speeds, and other value-added services. It's win-win, but, the question is: will the consumer support this? Many people live paycheck to paycheck and would not be able to afford a larger up-front cost even if it will save them money in the long run. So, it remains to be seen how well the plan for T-Mobile to end phone subsidies will work. All we can do now is sit and wait to see how it all plays out.

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