I Don't Want Smartphone Subsidies to Die—but They Should
The long-standing practice of buying a subsidized phone with a two-year contract must die.
By Andrew Moseman
Look at the current slate of iPhones on Apple's site and you'll see the familiar price structure: $199 for the 16-GB iPhone 5S and $99 for the 16-GB iPhone 5C (the reconstituted iPhone 5 that comes in fancy colors), while the iPhone 4S can now be had for free. "Free" is an illusion, of course. So are the other stated prices for iPhones and other high-end smartphones. These dollar figures represent the cost to buy a phone while being locked in to a two-year contract with heavy fees for breaking the deal—the way Americans have purchased smartphones for years now. But, slowly, things might be starting to change.
A year ago T-Mobile—the fourth-place U.S. carrier looking for a way to steal customers from AT&T, Verizon, and Sprint—said it would no longer sell phones at the subsidized, contract rate. You'd pay full price for the phone (though that can be done on an installment plan over the course of two years), but you wouldn't be stuck with a contract or an inflated bill, T-Mobile promised. Now one of its bigger competitors has echoed the sentiment: AT&T CEO Randall Stephenson reportedly said at a recent conference that "the model has to change. You can't afford to subsidize devices like that."
Make no mistake—Stephenson is speaking from the carrier's point of view here. They've been using the subsidized prices to entice Americans to take the dive into smartphones, since users would have been much slower to jump in if they had had to pay the full $650 cost of a new iPhone up front, as opposed to the $200 subsidized cost. Now that most Americans have a smartphone, carriers don't need to give such a steep discount. We users are already sucked in, and while we balk at our monthly bills, few people seriously consider going back to a dumb phone.
It would be a good thing for smartphone users if the current model starts to crack. But, in turn, we need to free our minds from the tyranny of the two-year upgrade cycle. I'm currently eligible to upgrade my outdated iPhone to a new device at contract price. I'll probably do it, partly to keep the unlimited data plan I'm grandfathered into and also partly because of the allure of $199, which just doesn't sound that expensive. Although the phone subsidy is voodoo economics, there's an instant gratification part of my brain that wants it to endure. I don't want to pay $650 for a new iPhone 5S. I want to pay $199 and deal with the monthly payments some other time. So I'll buy it. And when I buy it, I'll already have my mind on the next round of the cycle, tracking how many new generations will debut before I'm eligible to upgrade again.
To accept the two-year contract cycle is to accept everything that stinks about the smartphone experience: High monthly bills with no good way out and being tethered to your carrier's upgrade schedule. The early adopter who wants to upgrade to the newest phone a year into her two-year contract ends up paying the full, nonsubsidized price, but must keep making the same payments to the same carrier. That is, she gets all the up-front cost of buying a contract-free phone with none of the benefit. Then there are the millions of average users who buy a phone and then, when they're eligible for an upgrade, do so. Not because the newest generation available at that moment is a knockout product, but because it's there and it's your time to buy a shiny new thing.
The message from AT&T's Stephenson appears aimed largely at the phone-making giants such as Apple and Samsung, which make the largest share of their profits selling phones. I want—but don't need—a new iPhone. Apple, though, needs me to buy one every couple of years, lest its heap of cash diminish. Given the money that's rolling in, it's unlikely we'll see an overhaul in how we buy our phones. But we need that more than we need a new device.
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