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Really, Why Are Smartphones Still Tied To Contracts?

timothy posted about 6 months ago | from the be-the-change-you-want-to-see-in-the-world dept.

Cellphones 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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Let's save Bennett some time (4, Funny)

XanC (644172) | about 6 months ago | (#46891071)

Can you find any statement that is incorrect?

" why T-Mobile finds it profitable" (3, Informative)

wiredog (43288) | about 6 months ago | (#46891243)

T-Mobile is losing money. Something in the $100m/year range.

Re:" why T-Mobile finds it profitable" (2, Informative)

Shakrai (717556) | about 6 months ago | (#46891613)

That's because no amount of creative pricing and sexy marketing (random musing: CZJ was way better than pink motorcycle lady with annoying voice) can hide the fact that T-Mobile has a 1990s network in 2014. Seriously, it's pathetic unless you live in a major city, and even then you'll have to deal with inferior indoor coverage as compared to carriers with 850mhz licenses.

Here in Upstate NY your options as soon as you leave the city limits range from EDGE to "roaming on AT&T" (if T-Mo allows it where you're at, they don't in all areas) to "no service at all". I experimented with T-Mobile back in 2007-2008 when I couldn't afford to pay Verizon's premium prices and had to deal with zero coverage for the last ten minutes of my thirty minute daily commute. They've not really improved all that much since then, at least if their coverage maps are any indication.

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

Re:Let's save Bennett some time (1)

slashmydots (2189826) | about 6 months ago | (#46891287)

All of it?

Re: Let's save Bennett some time (3, Insightful)

the_humeister (922869) | about 6 months ago | (#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.

Re: Let's save Bennett some time (2)

mcgrew (92797) | about 6 months ago | (#46891659)

Indeed, the answer to his question is "because people are stupid." I have no contract, unlimited everything, and pay $40 per month. I'm not going to shill them, there are plenty of them so names aren't necessary. My daughter was paying three times that on AT&T and switched to the one I have (and an Android like mine) when her iPhone broke.

Re:Let's save Bennett some time (1)

Anonymous Coward | about 6 months ago | (#46891465)

"Because fuck you, that's why."
- Verizon.

"We don't care, we don't have to, we're the phone company."
- AT&T

Re:Let's save Bennett some time (0)

Anonymous Coward | about 6 months ago | (#46891741)

It's because they have the phone cops [youtube.com] on their side....

Re:Let's save Bennett some time (0)

pastafazou (648001) | about 6 months ago | (#46891493)

From a consumer point of view, the whole advantage of the long term contract is it allows you to get very expensive models for a much smaller comparative monthly payment. It's accepted that the company will profit over the life of that product more than if they had sold the device up front at $X.XX dollars. The carrier covers the up front expense, in exchange for a revenue stream with a profit in the future. However, I'm not so sure the average consumer knows how much extra profit that will net the company. And then there are those that just don't want to bother thinking about it and just pay the bill. The other factor to consider is the replacement of the unit should it fail before the 2 year contract is up....this is the part of the deal that consumers should be concerned with, as any accidental damage can end up costing you far more than you bargained for when you signed on.

Re:Let's save Bennett some time (2)

TsuruchiBrian (2731979) | about 6 months ago | (#46891675)

Did you even read what he said? He directly addresses exactly what you just said.

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.

Mystery solved (2, Insightful)

Anonymous Coward | about 6 months ago | (#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.

Why is it that cell phone companies... (0, Troll)

Anonymous Coward | about 6 months ago | (#46891083)

bla bla bla...

Because things change. Who the fuck cares?

Get this guy off Slashdot. He's a fucking moron windbag.

That's easy (5, Insightful)

Anonymous Coward | about 6 months ago | (#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.

Re:That's easy (4, Insightful)

ShanghaiBill (739463) | about 6 months ago | (#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.

Re:That's easy (3, Insightful)

Andy Dodd (701) | about 6 months ago | (#46891647)

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.

simple - if you don't pay I can turn off a phone (1)

Anonymous Coward | about 6 months ago | (#46891111)

If the customer fails to pay on the other products turning it off and or reclaiming it is difficult.

With a car it is high value so reclaiming can be done.

With a cell phone I can turn it off if you don't pay.

With a laptop and most other consumer stuff that does not work so well, and the item is not high enough value for the things that work around autos.

Re:simple - if you don't pay I can turn off a phon (1)

nurb432 (527695) | about 6 months ago | (#46891399)

Sure, its hard to physically reclaim, but filling suit is not expensive to get you to pay for it, due to breach of contract. Normally they dont even have to show to court, just file the papers and garnish wages.

Your Blog Sucks (4, Insightful)

Anonymous Coward | about 6 months ago | (#46891145)

Your Blog Sucks

They are? (0)

Anonymous Coward | about 6 months ago | (#46891161)

You know, here in Europe we haven't really heard about "deals" like that...

Re:They are? (0)

Anonymous Coward | about 6 months ago | (#46891377)

I guess someone had to say it; the grass is greener over here. You know what, good for you!

Because we *are* inconsistent (0)

Anonymous Coward | about 6 months ago | (#46891183)

"This explanation makes inconsistent assumptions about how dumb we are."

That is because humans *are* inconsistent.

Sure you can. (4, Insightful)

CronoCloud (590650) | about 6 months ago | (#46891215)

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

Re:Sure you can. (0)

Anonymous Coward | about 6 months ago | (#46891261)

Yep. The only reason people go with the big3 mobile carriers is their coverage while ow cost carriers dont do well outside of their original wireless region... that equates to premium pricing for bigger carriers and everyone goes along with it

Re:Sure you can. (1)

sandytaru (1158959) | about 6 months ago | (#46891407)

I paid $129 for my phone cash up front from Metro PCS. My service plan was $45 til I added in wi-fi tethering to bring it to $55/month. (My husband uses it more than I do though.)

Like its spouse T-Mobile, I can't use MetroPCS outside of large cities, except for emergencies or text messages. But if I'm out in the boonies, then I'm traveling from point A to point B on the Interstate or doing primitive camping - and don't need to be using my cell phone anyway!

Not a corporate decision (0)

Anonymous Coward | about 6 months ago | (#46891221)

No company these days does something customer-friendly on their own. In this case ETFs are actually illegal in some states and have been for years.

Lease? (4, Insightful)

SuperKendall (25149) | about 6 months ago | (#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.

Re:Lease? (1)

perry64 (1324755) | about 6 months ago | (#46891509)

I think that this is the perfect analogy to this. I don't do car leases because at the end of the lease, I don't get to keep the car. I don't care about having a new car, and I would rather drive an older car and not have a car payment. The older car essentially works just as well in its task of getting me from point A to point B.

With smart phones, it's different. The new smart phone may or may not be significantly better and provide significantly more functionality than the two year old one.

I no longer needed a cell phone for work, so I turned mine in. When I looked at buying one and going month to month compared to getting a contract with a cell provider and a discounted phone, I did the math, and the difference was under $20 over the course of the 2 years. I decided to go with the contract, since I wouldn't have to put out a high up front cost. Now when this contract is up, I will look at what the latest cell phones can provide that my current one can't, and decide whether that is worth the price of a new one. If yes, i will probably sign up for a contract and get a new phone. If not, I will just switch to a cheap month-to-month program.

Re:Lease? (2)

sunderland56 (621843) | about 6 months ago | (#46891699)

I don't do car leases because at the end of the lease, I don't get to keep the car.

At the end of a car lease, you can keep the car - if you want to. You just purchase it for it's agreed upon value. It's pretty much a win/win situation. You have a much lower payment over the length of the lease; and then you can buy and keep the car if you like it, or return it if you don't.

In essence - say you are interested in a $50K car. For a purchase, you make payments on a $50K loan. For a lease, you make payments on a $25K loan, and at then end you either buy the car for $25K, or return it.

Re:Lease? (1)

perry64 (1324755) | about 6 months ago | (#46891809)

When I've been considering it, the option of leasing and then buying the car was much more expensive than buying outright. It might not be that way all the time, but it was in mine.

Seriously? (4, Insightful)

dos1 (2950945) | about 6 months ago | (#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.

Re:Seriously? (2)

slashmydots (2189826) | about 6 months ago | (#46891301)

You're in Europe, aren't you? We can't do that here in the US.

Re:Seriously? (0)

Anonymous Coward | about 6 months ago | (#46891417)

Here in Europe we are not saddled with the antics of the US Carriers. Buying an unlocked phone is no big deal. Then you are totally free to switch to whatever tarrif you want. I'm on a 1 month rolling contract. 300minutes + 1GB for $15. No lock it at all. Oh, and where available, I get 4G at no extra cost.

A lot of people here use PAYG. No on a per day cost but on a minutes used. So (in the main) you can top up with $15 and it will last up to 90 days.

What the US needs is another carrier to come in an offer sensible pricing and the others will squirm. 4G linits of 2GB for $30? WTF? They are taking you people for a ride. When will you lot wake up and realise that you are being ripped off.

Re:Seriously? (0)

Anonymous Coward | about 6 months ago | (#46891463)

Ehm, we have realized it. Do you have some actual solutions apart from the "look at us we have it so good here in Europe" speak?

Re:Seriously? (0)

kthreadd (1558445) | about 6 months ago | (#46891549)

Please tell me, are there still major issues in Europe with roaming fees when crossing borders? The American carriers might suck but on the other hand they serve a way larger area.

What? (0)

Anonymous Coward | about 6 months ago | (#46891481)

Ever hear of Virgin Mobile? I bought a new unlocked AT&T droid phone from ebay and got service through Ultra Mobile. No hassles what so ever.

Re:Seriously? (1)

Erikderzweite (1146485) | about 6 months ago | (#46891547)

Hence the summary should read "Why is the US so backwards?". To which the answer is: "because people pay more this way".

Two-year contracts become less and less popular In Germany. There are people, of course, who want a new phone every two years and are ready to basically lease the hardware, but the prepaid options are getting more and more lucrative with an added bonus of being able to cancel the service at will.

If you want you can buy a dumbphone for 20 euros, get a prepaid card for free (some vendors even offer initial bonus) and give it a go.

Same with smartphones, I got my Nexus 4 directly from google and use prepaid with it. There is a vendor now who offers advertisement-paid mobile flatrate: you have to agree to receive an advertisement a day via SMS and the speed is cut to EDGE-level after the first 100Mb, but for me it is an ideal offer as I seldom call or send an SMS but use online messaging from time to time.

Re:Seriously? (1)

Obfuscant (592200) | about 6 months ago | (#46891579)

You're in Europe, aren't you? We can't do that here in the US.

Really? My last two phones were bought through eBay gray market from Europe (one is O2, one was Orange), unlocked, and all I had to do was put my T-Mobile SIM into them (plus set a few details for MMS and such in the config) and they work just fine. T-Mobile even told me some of the less obvious settings to make.

My current carry-around tablet (7" Galaxy Tab, vs. my larger Xoom) is locked to Verizon but bought off of Daily Steals, and Verizon would have happily turned on data service had I wanted to pay the ridiculous amount they wanted for it. As it is, it will time sync to the Verizon network without having service, and that's really all I need it to do via the 3g side. I can use my T-Mobile phone as a NAP to connect it to the net if I need it.

Or were you referring to someplace other than the United States of America when you said you can't do that in the US?

Re:Seriously? (4, Interesting)

mythosaz (572040) | about 6 months ago | (#46891607)

What are you talking about? Of fucking course we can do that here in the good 'ol U.S. of A.

What do you think happens with every Google Play Edition HTC One, or every Google Nexus?

The fact is that most people prefer to pay $25/mo burried in a contract over two years to pay for their new $600 cell phone, because this is America, the land of revolving credit and low, low monthly payments.

I've lost count of how many phones I've bought and just thrown my SIM in. The most difficult task I've had to ever do is walk into my provider and ask for a Micro-SIM card when I got a newer phone. The next time I get any hardware from them will be when I need a Nano-SIM.

That isn't to say that you can't use a plan to your advantage: I once got the entire family an "upgrade" for $25/mo on the package -- and got a whole pile of crappy Android 2.2 devices they were dumping -- but only because they lowered my service plan by $25/mo as incentive. [No doubt the sales associate got a perk for making the sale, and used their latitude in retention offers to lower my plan rate. Everyone won that day.] When the payment plan ended, my bill ultimately went down by $25 forever (or at least until they fuck all their customers again), and I had a pile of emergency phones I could just throw a SIM in when one of the kids invariably lost theirs.

Since I don't use their shitty "loan you $600, just sign up for two more years" upgrade plans, I'm always free to walk, and always free to negotiate the best rate for my plan or move to another carrier. So the next time they globally try to screw people, I can walk away without as much of a care, and put the next provider's SIM in my phone.

For that, I have to buy my phones outright -- like a responsible adult not living on the credit treadmill.

Re:Seriously? (1)

dos1 (2950945) | about 6 months ago | (#46891629)

Then just buy a phone from Europe? Or straight from manufacturer? I can easily buy US-banded version of Neo Freerunner or GTA04. Probably won't be problematic to buy any US-compatible Android phone from eBay as well. AFAIK ZTE Open is even sold there straight from the manufacturer. So you're telling me that all those phones won't work in US? What's the problem then?

Re:Seriously? (1)

sunderland56 (621843) | about 6 months ago | (#46891747)

Yes, you *can* do that here in the USA. I've done precisely that with the last 5 phones I've bought.

Re:Seriously? (1)

kthreadd (1558445) | about 6 months ago | (#46891421)

You know, everything is not like where you are even though you might think so.

Silly (0)

Anonymous Coward | about 6 months ago | (#46891263)

Now ask yourself this, if you buy the phone outright.... Does your plan go down? As a ex Sprint rep, you still pay your 39.99 for your plan. So why not get the free phone. Also many of these companies lock you into a contract for service even if you show up at their store with your own phone.

Re:Silly (2)

mythosaz (572040) | about 6 months ago | (#46891635)

Owning your phone outright generally puts you in a stronger negotiating position for maintaining service, since you're never locked in, you're always able to talk to a "retention specialist."

...but yes, if you're paying outright and not using this, and on a plan that would normally confer you "free" upgrades, you're probably losing out on the deal.

Convenience Factor (1)

maz2331 (1104901) | about 6 months ago | (#46891265)

For some people, it's likely that a single payment per month that includes the phone and the service is a nice and convenient way to make the purchase, especially if they are likely to upgrade the phone every couple of years anyway. For others, the a-la-carte purchase of phone and service is more appealing.

Re: Convenience Factor (3, Insightful)

shitzu (931108) | about 6 months ago | (#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.

Its like this... (4, Insightful)

JustNiz (692889) | about 6 months ago | (#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.

Re:Its like this... (2)

DerekLyons (302214) | about 6 months ago | (#46891697)

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?

That depends on what kind of bakeries they are - if they're high end artisanal bakeries, odds are it's the baker who puts his prices up who will be the survivor. Because he can be seen as offering a better perceived value, while the guy who cuts his prices can be seen as offering 'cut-rate' goods or catering to a lower class of customer. While it's true that in general the American consumer shops on price to the near exclusion of other factors (no matter how much the talk about quality, etc...), there are important exceptions.
 

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.

Except... T-Mobile's deal isn't significantly better. They make the bill look smaller by splitting it into two smaller chunks (phone and service), but the total isn't all that different unless you're only buying a POS low end droid. Listening to their commercials on the radio is an interesting excersise in the loud slow voice giving, while the quiet fast voice taketh away.

Because they can. (3)

nurb432 (527695) | about 6 months ago | (#46891327)

Quite simple really. As long as they can trap you due to lack of alternatives, they will. Once there are *viable* alternatives, then they wont do it any longer.

That aside, i do see many non-contract smartphones out there.. but they do cost you upfront, which is beyond many people's budget in this current economy. So i really dont see the point of the question anyway.

Re:Because they can. (0)

Anonymous Coward | about 6 months ago | (#46891611)

Micro-loans

Re:Because they can. (1)

mythosaz (572040) | about 6 months ago | (#46891681)

You can even make an argument that 24*$25 is less than $600, since you're getting a free two year loan of about $300 (the average balance on the loan over the 24 months)...

...but as long as people in this country prefer credit to cash, people are going to make this choice.

We are the land of YALLMP.

Yet another low low monthly payment.

Re:Because they can. (0)

Anonymous Coward | about 6 months ago | (#46891721)

$600 up front or an extra $20-$30 a month for 24 months (plus $200-$300 at contract signing).

Monthly budget would be freed up with a little saving before the initial purchase. Quality phones can be had for $400 retail.

Re:Because they can. (1)

nurb432 (527695) | about 6 months ago | (#46891807)

I guess I dont mean people cant at all, but a lot have a hard time saving up for it, since most are already paying the 'extra' for the phone in their hand now and many are low on funds out of the gate

Sounds like school paper time. (0)

Anarchduke (1551707) | about 6 months ago | (#46891329)

Quit asking us to do your homework for you.

Simple: So people will buy them. (4, Insightful)

T.E.D. (34228) | about 6 months ago | (#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.

Re:Simple: So people will buy them. (1)

Erikderzweite (1146485) | about 6 months ago | (#46891583)

Yeah, the upsides of such a tie are obvious, but the real question might be: why is this option so dominant in the US as compared, for example, to Europe?

Re:Simple: So people will buy them. (4, Insightful)

Jason Levine (196982) | about 6 months ago | (#46891649)

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.

Re:Simple: So people will buy them. (0)

Anonymous Coward | about 6 months ago | (#46891797)

Yea, but you are paying $70-$90 a month for service.

I bought my phone outright for $500, and pay $33 a month for service.
I'll have more than made up for the purchase price of the phone in savings in less than a year.

People DO spread cost over long periods (0)

Anonymous Coward | about 6 months ago | (#46891343)

"the obvious question is why that tactic doesn't work for other products sold just a few feet away at the same Best Buy"

It does. It's called a credit card. People use them.

Because it works (3, Informative)

Registered Coward v2 (447531) | about 6 months ago | (#46891361)

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?"

As TFA points out, it's generally a pricing perception issue. People will part with $0 upfront and pay $XX per month rather that $600 up front and $YY per month; even if the second option is cheaper. Since the first option results in more money companies do that

Why did T-Mobile decide to do it differently? The cell phone business is a high fixed cost (the network) low variable (carrying a call) cost industry. T-Mobile, as TFA points out is a much smaller #3. Even so, their fixed costs are probably not proportionately smaller since they still have a similar service footprint except perhaps in low density rural areas. So they need as many subscribers as possible to cover the fixed costs; hence a move to differentiate themselves in the market.

American finance is all about cashflow (1)

swb (14022) | about 6 months ago | (#46891795)

We're all about the here-and-now cashflow.

What gets me what I want right now for the lowest apparent monthly nut.

Wrong prices (0)

Anonymous Coward | about 6 months ago | (#46891375)

AT&T does not offer any smartphone plans for $40 or $25/month.

They start at $45/month ($25 base + $20 for 1 device) with 300MB of data. 2GB is $65/month ($25 base + $40 for 2GB.)

Re:Wrong prices (1)

kyrsjo (2420192) | about 6 months ago | (#46891793)

Ouch! I only pay 15 CHF (approximately 15 $) for 500 MB it Switzerland, and I think 1 GB would be ~20 CHF. There is no charge to keep the subscription (but then data is pay-as-you go, which is OK for a dumbphone or if you just don't use mobile data), calls inside the same network are for free, and calls to landlines abroad is cheap. Switzerland being outside EU, roaming in the EU is horribly expensive :/

It's also interesting that cellphones are so much more expensive in the USA than in Switzerland, given that mostly everything else is cheaper in the US (including wages) - and there seems to be some competition going on...

Random question: Are there any US operators offering a prepaid SIM with no subscription fee / prepaid? I'm travelling there from time to time, and it would be nice to have a SIM which I could stick into my phone when I land, not having to bother finding something new + new number etc.. So far I've just been roaming with my EU phone, but that's a bit expensive..

Higher than that (1)

CauseBy (3029989) | about 6 months ago | (#46891803)

As a former AT&T customer I guarantee the cost is even higher than that, but you'll never know how much the fees and taxes are until you start getting bills, and they'll never be the same month to month.

I have pre-paid service now. I pay $29.95 a month and I'm comforted by the fact that it is literally impossible for the carrier to charge me overages, or special taxes or fees, or whatever "fuck you" charges they want to dream up.

Re:Wrong prices (1)

mythosaz (572040) | about 6 months ago | (#46891811)

Many companies that piggyback on AT&T's equipment do, however.

http://en.wikipedia.org/wiki/L... [wikipedia.org]

I'm sure that among 420 Wireless (who donates to cannabis legalization), Cricket Wireless, Aio Wireless, AirevoiceWirelee, Black Wireless, Consumer Cellular, Divvy, GHz Cellular, good2GO Mobile, H2O Wireless, Jolt Mobile, KDDI Mobile SIM card plan, NET10 Wireless, Pure Talk USA, Red Pocket Mobile, SIM Shalom Mobile, SkyView Wireless, Straight Talk, or UTW Mobile who are all AT&T virtual network operators you can find a plan cheaper than $45/mo.

I looked at ONE site, and Net10 offers unlimited (throttled after 500m) Talk, Text, Data at $40/mo -- exactly what the OP posted, and BYOD.

I'm sure there's cheaper on the list.

Because they can? (0)

Anonymous Coward | about 6 months ago | (#46891395)

I always found it odd that you get charged both ways in the US for incoming and outgoing whereas Europe and the rest of the world has always only charged for outgoing minutes. It's because people don't know any better I guess.

Re:Because they can? (1)

kyrsjo (2420192) | about 6 months ago | (#46891643)

Yeah, that's strange - we only get charged for incoming if we're roaming. Even then incoming SMS's are often free.

Who is this Bennett... (5, Insightful)

Anonymous Coward | about 6 months ago | (#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?

It is called ... (0)

Anonymous Coward | about 6 months ago | (#46891419)

Well, if you pay for a phone outright, like a iphone 5 for 600 bucks, you are not locked into a contract. If you cant afford to pay that, you can get in anyway for 200 down and a payment plan - i.e. the contract or a guarantee for the wireless company they will have income and can get a ROI, the investment being you.

Maybe a question that makes more sense - are smart phone really worth what they charge for them? The answer is probably yes. So here we are.

Fuck Timmy (4, Insightful)

Jmc23 (2353706) | about 6 months ago | (#46891433)

and his bitch boytoy Benny.

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

$650 (0)

Anonymous Coward | about 6 months ago | (#46891441)

That's your answer.

90% of People Can't Manage Their Money (1)

aaarrrgggh (9205) | about 6 months ago | (#46891449)

Because people are inherently bad with managing money. A lower sticker price increases sales.

And, for the people that can manage their money, there is no material savings by not using the subsidy if you need to use ATT or Verizon.

Get this off /. (5, Insightful)

alta (1263) | about 6 months ago | (#46891487)

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?

forget soylent news... (2, Funny)

Anonymous Coward | about 6 months ago | (#46891489)

when beta goes live I'm switching to bennethaselton.blogspot.com

tl;dr (4, Insightful)

sootman (158191) | about 6 months ago | (#46891491)

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

Next!

Seriously, what is this shit doing on Slashdot?

It dosnt have to make sense (0)

Anonymous Coward | about 6 months ago | (#46891499)

Its designed by bean counters and MBA's

Lighten Up, Francis. (0)

Anonymous Coward | about 6 months ago | (#46891505)

You realize AT&T has moved to clearly specifying an installment plan for the hardware, with the full retail price clearly stated, right? At clearly defined dates (whether 2yr/18mo/12mo), based on slight changes in payments, you may simply swap your hardware--or not, just eventually pay the hardware balance to zero. At any point, the service can be terminated without penalty, save whatever balance remains on the hardware.

Terribly sorry if that gets in the way of being a petulant, insufferable douche with an astoundingly misplaced superiority complex. To many people, that is a perfectly reasonable transaction, save maybe getting gouged to death on the data rates, but that's a different story that has nothing to do with your perceived superior intellect.

Seriously, get over yourself, Bennett.

Blog (5, Insightful)

Anonymous Coward | about 6 months ago | (#46891511)

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

Those who don't learn history are... (1)

Tablizer (95088) | about 6 months ago | (#46891525)

Repeat after me: "Oligopolies Suck".

meh. (1)

rogoshen1 (2922505) | about 6 months ago | (#46891529)

because with a 2 year contract they only need about 20 minutes of customer service. without a contract, they have to constantly woo you, else you'll run off to the next trollopy cell phone carrier.

service contracts with ETF's are the most customer UNFRIENDLY fucking invention of the ever.

Only two explanations? Here's another (2)

mcappel (776700) | about 6 months ago | (#46891555)

It's not just "handsets are expensive, so we're selling them on an installment plan" or "because we provide locked-in service." It's because the cell phone companies, and indeed almost every other business, does not want a revenue stream at slightly above the cost of providing their service. Cell service providers want the greatest possible monthly revenue stream, which will almost certainly result in a higher margin, to occur over the conract period and beyond. They figured most of us wouldn't trade in their handsets every 2 years, which resulted in nice margins once the handsets were paid off. Did you see your cell bill drop after 2 years? I didn't.

If the cell phone companies could have gotten away with locking customers into 3-year+ contracts they would have, but that's a separate issue

It's not just T-Mobile nibbling away at AT&T, Sprint, and Verizon 2-year contracts. It's MVNOs putting pressure on the sacred 2-year contract, too.

At the risk of burning karma points, here's a consumer-focused article I wrote describing how MVNOs might save a consumer money in monthly service fees: http://www.bills.com/bills-blo... [bills.com]

Contracts no longer save people money (0)

Anonymous Coward | about 6 months ago | (#46891557)

AT&T now charges something like $25/month more per line for customers under contracts than for customers who own their own phones.

I think Verizon has a similar deal.

In any case, it is now clear to anyone that in addition to the contract price of the phone which for nice phones runs $99 to $199.00 from a carrier, you will, in the case of AT&T pay an additional $600 over the course of the contract for the phone over what you would pay if you own your phone outright.

In the past, the service cost the same whether you owned your own phone or not and thus, being under contract was in effect getting your phone for $200 plus the cost of 2 years of service. Now you can get the service cheaper and there is no reason not to buy (or let your carrier finance interest free) your phone and take the lower service rate that goes with it.

Because people are willing to pay? (1)

dicobalt (1536225) | about 6 months ago | (#46891571)

That doesn't mean it's worth that much though, just that they think it is. Perceived value vs real value.

Myopia (0)

Anonymous Coward | about 6 months ago | (#46891575)

There's actually a good chunk of evidence on myopic behavior (there's a whole branch of economics dedicated to this stuff).

The comparisons in the parent aren't particularly apt. Buying a laptop or a car is a one-time thing. It's not the same as a cell phone service which takes the form of a business relationship over a *prolonged* period of time.

If you look at such longer-running contracts for services, you can actually find many similarities. E.g., a cable company might heavily subsidize the hook-up. A financial intermediary might take a loss to win you as a customer (e.g., they might absorb the costs for setting up a securities account, doing initial counseling, etc.)

Terrible article, avoids/dodges questions (4, Interesting)

TrollstonButterbeans (2914995) | about 6 months ago | (#46891581)

This article is pretty bad from this prespective. It raises certain questions and explores them, while ignoring all other possible questions.

Which is a very pretentious way of thinking.

A few of the comments here hit it head on (i.e. upfront costs too high, lock-in, etc.).

But a really large factor = in the 1990s there were tons of cell phone companies and it was an emerging market.

And these cell phone companies had major infrastructure expenditures because at the time coverage was mostly near major cities.

The typical WIN-WIN arrangement with customer and provider is the customer gets a low price (and all the greatness of a phone that works anywhere, unlike a landline) and the provider gets the security of having a stable cashflow to continue to improve their product and experience.

But Verizon and AT&T are monopoly utilities, thank goodness there is still T-Mobile as a 3rd option.

I am disappointed by this article, even in a few of the question are good, in that apparently the author of the article didn't think that any history of the cell phone industry was important to see the present in context of the past. History always sheds quite a bit of light on the present.

You can buy a phone outright (0)

Anonymous Coward | about 6 months ago | (#46891585)

There is nothing requiring you to sign a contract with any carrier. If you BYOD or pay the entire cost of the phone you can go without a contract.

My complaint is that if I BYOD like my Nexus 5 and the phone company is not subsidizing the phone, why do I pay the same monthly fee as the other customers that have a subsidized device?

Doy (4, Informative)

CanHasDIY (1672858) | about 6 months ago | (#46891617)

Because they make more money that way, doofus.

Seriously, who is upvoting this guy's blog posts in the firehose? Or does he have some dirt on the editors? Can't figure out why these BS BH posts keep making it to the front page...

because most people don't need a smartphone (1)

alen (225700) | about 6 months ago | (#46891623)

i wouldn't have bought my Note 3 if i had to pay $800 and a high monthly price
i call, text, read the news and some books
a cheapo phone to text and a kindle or wifi only ipad would be more than enough for me

cellular data is a luxury for most people and not really needed to go about their daily life

Stupid title - not like this in most of the world (3, Informative)

kyrsjo (2420192) | about 6 months ago | (#46891633)

The title of the article is:
"Really, Why Are Smartphones Still Tied To Contracts?"

However, this is really an American phenomenon - in most of the world the most common is to buy the phone you want "cash", then get a SIM card from the provider you want (or just move over your old SIM).

This also means that it's common to get a prepaid SIM if one goes abroad for more than a few days, in order to call/receive calls for cheap, and use data without being fleeced. It also means that the phones are not branded the same as the network, but branded as Samsung / HTC / Apple / etc.

Cable Companies would love this.... (1)

Amtrak (2430376) | about 6 months ago | (#46891645)

Look you ask why other companies don't do this and the answer is simple, they can't get away with it. Every cable company on the planet would love to have invented the practice. I could even see this ad happening:

"Super Def TV"! Only Available on Xfinity! Get your Super Def TV today with 2 year cable contract.

Hell, they already do this with DVR's. Why don't people just buy a TIVO or TV with cable card slot instead of paying Comcast $15 a month for a DVR? Because they don't think that way.

The real answer is that companies have figured out that most people won't sit down and do the accounting to figure out what the true amortized or depreciated cost of any item is over the long term. They instead just look at the advertised price and compare apples to cats.

American's don't think, "I have enough cash for that." They think, "I have enough credit for that." and could give two shits that the item costs them 200% more over 2 years. The only way to fix it is to make credit harder to get but then our economy would collapse (sooner) so.... yeah bring on the credit bubble baby!

Disagree (1)

CauseBy (3029989) | about 6 months ago | (#46891657)

I just bought a new Galaxy S4, cash up front, and bought pre-paid service for it. Before that I had a Droid X, for which I paid cash, and with which I had pre-paid service.

In my opinion phone contracts are for chumps and despite all the evidence I try to think of myself as not a chump.

If you live in Madison, WI I suggest U-Wireless.

Really! (3, Insightful)

Anonymous Coward | about 6 months ago | (#46891661)

Really, Why Are Bennett Haselton Articles Still Being Posted?

I paid cash for my iPhone (1)

sandbagger (654585) | about 6 months ago | (#46891671)

I knew going in that I'd be keeping it longer than the average user who must have the new thing every 18 months. Thus, it was cheaper in the long run than to be paying a carrier for the cost of financing.

first-mover (1)

Unordained (262962) | about 6 months ago | (#46891701)

I worked as a programmer for the sales & marketing arm of a cell company, 6 years ago. It was quite clearly stated (internally) that they wanted to get out of the subsidy business, but they couldn't. They were too small to take the risk of being the first or only to do so in their market. So long as other carriers were offering subsidies with their contracts, making the move would be suicidal. We probably weren't the only company in that situation, but unless you could come to some grand bargain, nobody was going to move first.

Not Unique, pretty much standard (1)

timmyf2371 (586051) | about 6 months ago | (#46891711)

Smartphones are like most other consumer electronic goods which need some form of service contract to get the most out of.

- Satellite/Cable box - free, but you can pay more to get a PVR.
- DSL/Cable Modem - free, but you can pay more to get a fancy WiFi router.
- Smartphone - free, but you can pay more to get a better model.

Not sure what the difference is and why this key point was missed in the blog.

MVNO for Cheap People (0)

Anonymous Coward | about 6 months ago | (#46891719)

I refuse to pay $60/month for cell phone service. I'm switching to an MVNO that offers per-minute charges. Yearly cost will only be around $50 a year.

What's surprising is that the major carriers won't allow smart phones without data plans (so no per-minute plans with cheap Android phones). It's really infuriating the restrictions some of these companies place on their service. I'm surprised MVNOs even exist.

This may be relevant... (1)

smithmc (451373) | about 6 months ago | (#46891723)

...apparently T-Mo is now America's fastest growing carrier [dailytech.com] . So maybe they're on to something.

What is the monthly payment? (1)

kb7oeb (543726) | about 6 months ago | (#46891729)

A lot of people haven't learned to look at total cost when making a purchase. They look to see if they can afford the monthly payment and stop there. You see the same thing when people buy a house or a car.

"Extended Warranty! How can I lose?" -Homer

they never have been. (1)

nimbius (983462) | about 6 months ago | (#46891759)

As a consumer in america ive always had the choice of locking into a 2 year contract and receiving my phone at a subsidized price, or paying full price. the first month is still prorated but i always choose to pay a little extra for the privilege of actually owning my device instead of the plan, which feels more like renting. your ultimate penalty for shunning a wireless carriers extreme savings deal on a bundle of contractual nonsense is add-on fees from hell and quite a bit more marketing than normal. I've been charged $25 just for the SIM card, $45 for activation, and another $18 for some amorphous 'network initialization.' Theyll even try to sneak insurance and free replacement in. since cellular jocks in strip malls are payed a commission for contracts they rope people into, you're also going to get some pretty lousy service once they realize you chose financial independence instead of indentured servitude.

yeah, Haselton is right. cellular isnt about the phones or the cases or extras, its about contractual service agreements that ensure repeat business. companies use nice electronics and catchy tv commercials; whatever it takes for the dog to bite. you can stick it to them by being a lousy customer. refuse to upgrade every 4 years as youre instructed to by the moving pictures. use an adblocking hosts file. root your phone, and use its data monitor to ensure your data plan, which should be 500mb or less, is never exceeded. use wireless access points and VoIP across them. disable opt-in advertising by sms and opt out of mail flyers.

Not that complicated ... (3, Insightful)

gstoddart (321705) | about 6 months ago | (#46891763)

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 [nerdwallet.com] 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.

Because they can (0)

Anonymous Coward | about 6 months ago | (#46891775)

For the same reason that internet, cable TV, etc. are sold this way (not always, but typically). Why are we still paying for 300 channels, of which we watch maybe 5-8? Because that's how they sell it!

Contracts are not designed to be good for the consumer, they are good for the seller. And as long as all or most sellers have similar plans and prices, they can get away with it.

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