Would the DOJ get involved if the 3 Big Carriers end phone subsidy at the same time?

EbookReader · Jan 1, 2013

http://seekingalpha.com/article/1081191-why-phone-subsidies-are-here-to-stay-in-the-u-s'

The future of smartphone subsidies has been a frequent topic of conversation on Wall Street over the past year or two. Analysts have speculated that wireless carriers are unhappy about the subsidy model, where they must incur large up-front costs in order to attract (and retain) subscribers. Analysts have been particularly concerned that carriers will eventually refuse to subsidize Apple's (AAPL) iPhone by $400 or more, as they currently do. Obviously, there would be a great benefit to Verizon (VZ), AT&T (T), and Sprint (S) if they could maintain the same subscriber fees while cutting subsidy costs. However, it is one thing to say that the phone companies would like to reduce subsidies, and another thing to say that they will actually do so.

The problem for telecom companies is that they face a "prisoner's dilemma" scenario in the smartphone market. In game theory, the prisoner's dilemma refers to a "game" where the players are better off cooperating, but each individual can do better by "defecting" (i.e. not cooperating).

Therefore if one or two wireless carriers reduce subsidies, the others have a strong incentive to maintain subsidies and promote them as a differentiating factor in order to gain market share. If all three reduced subsidies simultaneously, most subscribers would probably resign themselves to paying more for their smartphone upgrades. However, the carriers are not permitted to collude (e.g. by signing an agreement to change pricing simultaneously). As a result, each individual carrier knows it could benefit from maintaining subsidies while other carriers raise prices; alternatively, raising prices while other carriers maintain their subsidies would result in customer loss and eventual profit declines.

Verizon the first to do "shared data plan." AT&T followed suit.

What if AT&T end subsidy and Verizon follow suit. Then Sprint too?

Customers will pay installment plans instead.

Example: $199 upfront then $20 a month for 24 months for the phone. As long as the phone service is $20 less each month, it is the same pricing as the subsidy model. The customer won't even notice the difference.

Subisdy: $199 upfront and $100 each month
No subdidy: $199 upfront and $20 each month + 80 each month

SilentLoner · Jan 1, 2013

EbookReader said:
http://seekingalpha.com/article/1081191-why-phone-subsidies-are-here-to-stay-in-the-u-s'

Verizon the first to do "shared data plan. AT&T follow suit.

What if AT&T end subsidy and Verizon follow suit. Then Sprint too?

people would just go pre pay and their revenue would tank.

Spectrum Abuser · Jan 1, 2013

EbookReader said:
Example: $199 upfront then $20 a month for 24 months for the phone. As long as the phone service is $20 less each month, it is the same pricing as the subsidy model. The customer won't even notice the difference.

Subisdy: $199 upfront and $100 each month
No subdidy: $199 upfront and $20 each month + 80 each month

I'm confused by your examples. Where does the $80 additional dollars per month come in with the non-subsidized plan? And without a subsidized handset the upfront cost would be in the range of $449.99-$849.99 depending on which phone and configuration you chose not including the activation fee or first months plan cost.

wxman2003 · Jan 1, 2013

I think DOJ would encourage the end of subsidies. In fact, I think it would be the best thing for competition.

EbookReader · Jan 1, 2013

Spectrum Abuser said:
I'm confused by your examples. Where does the $80 additional dollars per month come in with the non-subsidized plan? And without a subsidized handset the upfront cost would be in the range of $449.99-$849.99 depending on which phone and configuration you chose not including the activation fee or first months plan cost.

Subisdy: $199 upfront and $100 each month
No subdidy: $199 upfront and $20 each month + 80 each month

sorry if it is not clear

Subsidy: $199 upfront for the device and $100 each month for 24 months contract

No Subsidy: $199 upfront for the device and $20 a month installment for 24 months to pay off the phone + $80 a month for the wireless service for 24 months.

After the 24 months is up, your monthly bill will now be $80 a month because you have paid off your phone cost.

wxman2003 · Jan 2, 2013

I would hope they would end all types of subsidy. You pay full price up front. Phones all unlocked, no contract, and can work on every carrier. Then you will see real competition.

EbookReader · Jan 2, 2013

T-Mobile no-subsidy (but with financing plan) is basically the same as subsidy.

$199 upfront for the phone
$20 a month installment for 24 months to payoff the phone
$70 a month for wireless service

T-Mobile subsidy model

$199 upfront for the phone
$90 a month for 24 months

Customers won't notice a thing because in both scenario, the customers pay

$199 upfront and $90 a month for 24 months

You pay full price up front.

Or pay using financing (in installments).

T-Mobile, Metro PCS and Cricket are now doing this.

wxman2003 · Jan 2, 2013

Until the carriers allow all unlocked phones on their networks, and phone manufacturers build phones that work on all networks, there will be no competition. No phone should ever be locked to a carrier. It stymies real competition.

viperGTS · Jan 2, 2013

If subsidies end, contracts better end too (like the 2 year agreements and such).

hafr · Jan 2, 2013

viperGTS said:
If subsidies end, contracts better end too (like the 2 year agreements and such).

Why on earth would contracts have to end just because subsidies end? If you tell a carrier "I'm willing to give you my money for two years", they're going to be able to offer you a better deal than if you tell them "I want to buy a SIM-card, but give you no guarantee what so ever that I'll ever give you any more money".

upnorth85 · Jan 2, 2013

Thanks to FCC and FTC the foxes guarding the hen houses the US is the most concentrated wireless market in the western world. 80% of the US market s controlled by the duopoly of AT&T and Verizon wireless. T-mobile was an outside chance when they started reframing their network be compatible with iPhone frequencies. But with 100 million population now "covered" in 23 cities, their 3G network is turning out to be worse than Sprint. Here in the twin cities, their coverage is spotty and weak. I thus do not see any impact on the subsidy model from Tmobile's entry. However Verizon wireless CEO did say last summer that Android phone users cross subsidize iPhone users and so if any one company reduces subsidy it will be Verizon. A comparison do AT&T and Verizon LTE coverage shows Verizon's vast nationwide coverage over AT&T.

barkomatic · Jan 2, 2013

wxman2003 said:
I would hope they would end all types of subsidy. You pay full price up front. Phones all unlocked, no contract, and can work on every carrier. Then you will see real competition.

I have a feeling carriers might have something different in mind. They'd end the subsidy, charge the same monthly price as always, lock the phones and still require a contract.

The carriers want to minimize their commitment to you, but want to maximize your commitment to them.

Anyway, with the end of subsidies, I'm not sure people would pay up to $849 for an iPhone.

sracer · Jan 2, 2013

barkomatic said:
I have a feeling carriers might have something different in mind. They'd end the subsidy, charge the same monthly price as always, lock the phones and still require a contract.

The carriers want to minimize their commitment to you, but want to maximize your commitment to them.

Anyway, with the end of subsidies, I'm not sure people would pay up to $849 for an iPhone.

That's why I believe that T-Mobile is the first Nationwide carrier to announce the end to phone subsides. They don't currently have the iPhone so they don't have a commitment with Apple to sell x number of iPhones. Sprint is probably in the worst position.

ftaok · Jan 2, 2013

If you really think about it, the US carriers like the current model. In fact, everyone likes the current model, except for a few consumers. Here's why.

With the current US subsidy model, the carriers get a customer locked in for 2 years. All it costs them is a phone subsidy, let's say $300 to $450. Over the course of the 2 years, they charge about $20-$30 more per month on the plan. When the contract ends, the customer either keeps the phone and continues to pay the same monthly rate, or they re-up the contract and get a new phone.

The carriers love this as it's either a locked in customer or they get high rates without paying a second subsidy. The phone manufacturers love this as people replace phones that are otherwise still useful. Many customers love this as they get a brand-new toy every two years and the costs are nearly transparent.

The people who hate this are the folks that tend to keep their stuff for more than 2 years. At the end of the 2 year contract, there really is no incentive to keep the old phone since the monthly rates are the same, either way.

I suspect that the carriers (other than T-mobile) are getting nervous about T-mobile's plans. If the subsidy free model takes off, then we may see more and more people hang onto their phones for 3 or 4 years before getting a new one. That means less money on monthly fees for years 3 and 4.

Phone manufacturers will be crapping bricks as well since there would be fewer customers upgrading to the newest models.

As for the DOJ getting involved, I wouldn't worry about it because I don't think it will happen. And even if it did, there's no real competition as the phones are different between the carriers anyway (thanks for that FCC). It's not like in Europe where all the carriers use the same tech and frequencies so that you can take your phone and swap your carrier at will.

In the US, you can't take your AT&T phone and swap a SIM and use Verizon ... well, you can, but you don't get access to everything.

CEmajr · Jan 2, 2013

EbookReader said:
T-Mobile no-subsidy (but with financing plan) is basically the same as subsidy.

$199 upfront for the phone
$20 a month installment for 24 months to payoff the phone
$70 a month for wireless service

T-Mobile subsidy model

$199 upfront for the phone
$90 a month for 24 months

Customers won't notice a thing because in both scenario, the customers pay

$199 upfront and $90 a month for 24 months

Or pay using financing (in installments).

T-Mobile, Metro PCS and Cricket are now doing this.

Correct, except it's $20 for 20 months for the installments rather than 24 months so those who choose the "no subsidy" plan with T-Mobile actually pay less over the course of the contract than those who get the subsidized price with the permanent higher monthly bill.

It works out for the consumer as long as the carrier offers a lower price bill once the phone is paid off or if the consumer pays full price outright for the phone. Obviously it works out for the carrier as well since they get full price for the phone over time.

corvus32 · Jan 2, 2013

Buy your iPhone and go prepaid is what I've been telling people.

You can save a lot of money versus locking yourself into a two-year contract with a subsidized one:

Verizon iPhone 5 with 2-year contract and 2GB data:
$199 + ($100 x 24) = $2599

Unlocked iPhone 5 with Net10/ST over two years:
$650 + ($45 x 24) = $1730

That's $870 right there.

And, you can upgrade whenever without worrying about ETF's or other fees and penalties. Just swap SIM's, update your APN settings, and you're good to go. You can sell your old phone or gift it to someone.

hafr · Jan 2, 2013

barkomatic said:
I have a feeling carriers might have something different in mind. They'd end the subsidy, charge the same monthly price as always, lock the phones and still require a contract.

The carriers want to minimize their commitment to you, but want to maximize your commitment to them.

Anyway, with the end of subsidies, I'm not sure people would pay up to $849 for an iPhone.

The only people who wouldn't pay the sum up front or pay it in instalments are those who really believe that the phone doesn't cost more than the subsidised price and don't understand they're paying at least the full cost of the phone in increased monthly charges over the course of the contract.

And if the phone is no longer a factor in choosing carrier, it opens up for price competition. Most likely it will take a few years for newcomers (both actual carriers and virtual carriers, those who pay a proper carrier to use their network) to start offering some real competition.

In France for instance, there is now a carrier offering 3 GB of data, unlimited texts and free calls in France, and to the US and Canada, plus unlimited calls to land lines in Europe. All this for 25 dollars per month prepaid.

----------

ftaok said:
It's not like in Europe where all the carriers use the same tech and frequencies so that you can take your phone and swap your carrier at will.

In the US, you can't take your AT&T phone and swap a SIM and use Verizon ... well, you can, but you don't get access to everything.

In Europe, the carriers lock their subsidised phones to their network and you'll have to pay a fee to be able to use it with another SIM card.

takeshi74 · Jan 2, 2013

EbookReader said:
Would the DOJ get involved if the 3 Big Carriers end phone subsidy at the same time?

From your own post:

However, the carriers are not permitted to collude (e.g. by signing an agreement to change pricing simultaneously).

If there's indication of collusion, they will. If they have no reason to suspect collusion, they won't.

ftaok · Jan 2, 2013

hafr said:
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In Europe, the carriers lock their subsidised phones to their network and you'll have to pay a fee to be able to use it with another SIM card.

Do they lock the phones if it's bought without a subsidy? Locking a phone that's under a subsidy is OK in my eyes ... as long as they allow for free unlocking after the contract is up.

Wicked1 · Jan 2, 2013

No, unless each or one of them was doing something that was not fair and just.

The subsidy they provide is only to keep you locked into them, the DOJ does not worry about that, but if one of them were to do something unfairly they might.

----------

ftaok said:
Do they lock the phones if it's bought without a subsidy? Locking a phone that's under a subsidy is OK in my eyes ... as long as they allow for free unlocking after the contract is up.

that is how AT&T, VZ, and Sprint work in the US, however if you pay full price, then you get a factory unlocked phone. I am still not sure why if you are on one of the three carriers that you would pay full price and not get the discount if you intend on staying there. I have been with AT&T since 2008 this time, and no plans on leaving, so I will take the discount.

ftaok · Jan 2, 2013

Wicked1 said:
that is how AT&T, VZ, and Sprint work in the US, however if you pay full price, then you get a factory unlocked phone. I am still not sure why if you are on one of the three carriers that you would pay full price and not get the discount if you intend on staying there. I have been with AT&T since 2008 this time, and no plans on leaving, so I will take the discount.

Yeah, in the US, if you're with VZ, AT&T or Sprint, there really is no reason to NOT take a subsidy and get the phone on a discount. Not unless you're forced to do so if you want to retain unlimited data or something.

The bottom line is that the monthly fee (in the US) remains the same whether you're on/off contract or have a subsidized/full-price phone. So it's better to get the subsidy and take a new phone. It's not like you can take the phone and jump to one of the other carriers anyway.

Anyways, my original thought referred only to Europe. hafr was referring to a subsidized phone in Europe and I was referring to an unsubsidized one. Not sure if a full price phone in Europe gets carrier-locked or not. I would assume that it's unlocked.

EDIT - just read Wicked1's reply. I was missing the word "not" in the 1st paragraph. Sorry.

Wicked1 · Jan 2, 2013

ftaok said:
Yeah, in the US, if you're with VZ, AT&T or Sprint, there really is no reason to take a subsidy and get the phone on a discount. Not unless you're forced to do so if you want to retain unlimited data or something.

The bottom line is that the monthly fee (in the US) remains the same whether you're on/off contract or have a subsidized/full-price phone. So it's better to get the subsidy and take a new phone. It's not like you can take the phone and jump to one of the other carriers anyway.

Anyways, my original thought referred only to Europe. hafr was referring to a subsidized phone in Europe and I was referring to an unsubsidized one. Not sure if a full price phone in Europe gets carrier-locked or not. I would assume that it's unlocked.

Your reply is confusing, in the first section you say don't but then in the second section you say take the discount? Maybe you meant to say something else I am not sure.

viperGTS · Jan 2, 2013

hafr said:
Why on earth would contracts have to end just because subsidies end? If you tell a carrier "I'm willing to give you my money for two years", they're going to be able to offer you a better deal than if you tell them "I want to buy a SIM-card, but give you no guarantee what so ever that I'll ever give you any more money".

Maybe because 2 year agreements exist because of the subsidies?

I'd rather pay full price up front for the phone and not be tied to anything, rather than pay the full price over 2 years while STILL on a contract.

EbookReader · Jan 2, 2013

corvus32 said:
Buy your iPhone and go prepaid is what I've been telling people.

You can save a lot of money versus locking yourself into a two-year contract with a subsidized one:

Verizon iPhone 5 with 2-year contract and 2GB data:
$199 + ($100 x 24) = $2599

Unlocked iPhone 5 with Net10/ST over two years:
$650 + ($45 x 24) = $1730

That's $870 right there.

And, you can upgrade whenever without worrying about ETF's or other fees and penalties. Just swap SIM's, update your APN settings, and you're good to go. You can sell your old phone or gift it to someone.

prepaid is the way to go

$30 for 100 minutes, unlimited text and 5GB of 4G speed data on T-mobile prepaid is also popular.

If Amazon and Google start selling smartphones at cost like they do with tablets, it could be good for the consumers. Not sure if the Nexus 4 at $299 is selling at cost or not.

MattMJB0188 · Jan 2, 2013

It would be so typical that one A*hole would take this to the DOJ. I think ending phone subsidies would be awesome. T-Mobile definitely has lit a flame under the other carriers' asses haha.

I have purchased at full retail for so long now and love it!!!

Would the DOJ get involved if the 3 Big Carriers end phone subsidy at the same time?

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