How carriers and subsidies are more like sharks and loans

How carriers and subsidies are more like sharks and loans

Last week AT&T's Randall Stephenson was once again repeating the familiar refrain: that Apple and the iPhone (and now other premium smartphones, like Samsung's) demand far too high an up-front price from carriers. If anyone should be charging anyone too much, dammit, it's the carriers! Jean-Louis Gassée, once of Apple, now of Allegis Capital, lays out the case for their shameless complaints in his Monday Note:

I don’t know if Stephenson is speaking out of cultural deafness or cynicism, but he’s obscuring the point: There is no subsidy. Carriers extend a loan that users pay back as part of the monthly service payment. Like any loan shark, the carrier likes its subscriber to stay indefinitely in debt, to always come back for more, for a new phone and its ever-revolving payments stream.

The reason for this is well stated by Horace Dediu of Asymco:

The iPhone is primarily hired as a premium network service salesman. It receives a “commission” for selling a premium service in the form of a premium price. Because it’s so good at it, the premium is quite high.

It's not rocket science. It's a $650 phone we're getting for $199 and the $450 difference is largely being paid up-front to Apple by the carriers, who then make their money off the contracted plan for 24 months. If the plan is $60 a month, that's $1440 in their pockets. If it's $100 a month, that's $2400. Sure, networks are expensive to build out and maintain, but at the average revenue per user (ARPU) levels the iPhone pull down for them, it's tough to argue the carriers still don't end up well, well ahead of the game.

Of course they want to pay Apple less. I want to pay the carriers less. Gassé does as well, and tries just that. Read the rest of his note to find out the outcome...

Source: Monday Note

Rene Ritchie

Editor-in-Chief of iMore, co-host of Iterate, Debug, Review, Vector, and MacBreak Weekly podcasts. Cook, grappler, photon wrangler. Follow him on Twitter and Google+.

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How carriers and subsidies are more like sharks and loans

29 Comments

If the cell phone pricing model was so great... cableTV providers would supply TVs in much the same way consumers get cell phones today...

Yes they do. I know we used to rent a cable box. Only recently did I consider buying a PCI card for my PC to replace it. The thing is, you're kind of forces into compatibility with the service. The same is true of cell phone carriers.

I don't know about satellites but the cable box is just a rental fee, at least for Comcast, you don't get to keep it if you terminate service nor do you ever own it any point.

"They do that with cable boxes and satellite equipment, don't they?" -- they do... but my point is, if the cell phone model were such a good one - they (cable providers) would be selling TVs the same way cell providers do phones... they're not.

In most markets, wired utilities have no competition. No incentive to give you anything. With wireless there are usually multiple carriers (I have my pick of 6 of them).

That's interesting and they want to charge us the full price and probably will not lower our rate of the plan either. Greed......

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Carriers are making a lot of money off customers, I pay roughly $160 a month. $3840 for 2 years, so that's $3,040 after the cost of 2 iPhones (after the $400 up front cost of 2 16 gig iphones). I would say they are making a pretty darn good profit off of me. I use an average of 4 gigs a month between the 2 so throw in the people who use a lot more data, people who have 5 lines on their account, businesses, and all the other data devices used, carriers are doing just fine.

At AT&T (and maybe other carriers), the monthly price for service is the same whether I bring my own device or not, and whether I am out of contract or under contract. So it doesn't benefit me to pay full price the phone! In fact, I spend less by being under contract.

True, but if you get a new phone and use their credit option to get it, it ends up being more monthly than if you go contract. kind of funny really. It's not the deal you'd think up-front.. Thats a carrier for you!

I don't mind the while carrier/subsidy thing when the carrier is worth it. But with AT&T (who I'm stuck with until September of 2014), it's not. Can't wait to switch!

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I don't mind the while carrier/subsidy thing when the carrier is worth it. But with AT&T (who I'm stuck with until September of 2014), it's not. Can't wait to switch!

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As of 12/18/13 AT&T is changing their plan pricing. If you don't buy a subsidized phone your monthly plan will cost less.

yeah the new plans went into effect last sunday. I signed up (switched from T-Mobile cause I was getting terrible signal) yesterday for a no contract plan. Since I brought my iPhones that I purchased with T-Mobile it was cheaper. Also now I get LTE at my house, with T-Mobile I could sometimes, if I went outside get one bar of Edge. <.<

What's always kicked me in the berries about subsidized iPhone plans is this:
Sure I get that we pay of the remainder balance on the phone over the next 2 years, but after that term, the cost of the monthly bill remains the same... If the subsidized iPhone cost was rolled into the monthly bill and the phone becomes paid off - why are we still paying the same price? It's like paying off your car but still sending a monthly payment just so you can continue to drive it on the road.

This is why it was always best to upgrade at the end of your contract. But, with phone upgrades getting more incremental than revolutionary, and market saturation getting to a point where everyone has a phone handed down to them or bought elsewhere, people are getting off contract and just wanting phone service.

What really bothers me is that my iPad mini with LTE costs $10 per month to add to my shared data plan, and an iPhone costs $30 a month for the same thing. The price of an iPhone is dramatically higher than an iPad mini with LTE, and the only thing missing in my opinion, is "real phone and text" and the earpiece. Get Google Voice and boom, you've basically got a working phone and text. If I'm not mistaken, all the cellular radios are still there, but carriers and/or manufacturers ridiculously jack the price of phones, but not cellular-enabled tablets.

T-Mobile has it right and is the reason I'm switching at the end of my Verizon contract. When the phone's "loan" is done, whether at the end of the contract, or if I decide to pay it off early, my monthly cost will drop significantly.

Yes. That is the reason why I have a 4S and will probably not upgrade until the 6 rolls around. If I can work things right, this time I'd like to try and shell out for an iPhone up front to hopefully avoid this game. That seems to be the best option.(?)
The difference in the iPhone and the iPad floored me... That's nuts.

This is the beginning of my argument. I agree with that statement completely.

Let's say that AT&T removes subsidies or let's call it a loan, whatever. Do you think that they are going to reduce the monthly service charge since there will no longer be a cost recovery for the handsets? I think not!!!

One of the reasons why I will never go back to AT&T. We all know that all wireless carriers are just doing their business to stay profitable. but this guy is just a prick for being all too obvious and letting the world know that nothing matters more to him and his shareholders than that.

Remember when AT&T was the exclusive carrier of the iPhone back for the first three years? I stupidly stood on line of about 500 at AT&T and was lucky to be one of the 80 customers who were able to get an iPhone that day. Needless to say, a riot ensued when the other 420 stood on line for nothing, while the Apple store across the hall was able to take care of nearly everyone.

Now, how is it that an "exclusive carrier" was stocking only 80-200 iPhones at your average store at each launch? One would easily come to the conclusion that AT&T did not want to pay its own employees for the commission earned by signing up a customer to a contract. I mean, why do that when Apple will do it for free? Just hand them access to their activation servers and each customer will get the usual five-star treatment at the Apple Store, unboxing and setting up, without any sales pressure or tactics?

After the iPhones sold out at each launch, I hung out at the mall and watched the AT&T salespeople sit sullenly at their kiosks and counters, watching scores of customers sign up at the Apple store, knowing they're not getting a dime for those contracts and sales on accessories.

If AT&T doesn't care enough about their own employees, what makes you think they 'd care about their customers?

Remember when the iPhone 3G came out and all of a sudden, we went from a $20 unlimited data and texting plan to $30 for unlimited data without texting? Then, we went to tiered, especially right after the iPad came out? Let's not forget about the scores of network issues and dropped calls that became the butt of many jokes by late night television hosts and punchlines on prime-time TV shows.

Remember "Seth the Blogger Guy?" Who was he supposed to be? One of "us" who wanted to quell the growing crowds of unhappy customers with an animated presentation of how they couldn't keep up with the network load? Of course, he failed to mention the billions of dollars AT&T earned each quarter that happily lined the pockets of the executives and their shareholders.

Now, we've got shared plans that divvy up the paltry amount of data we already get with only a sliver of a savings. People are getting smart (and/or tired), bringing devices with them and/or upgrading less, or shifting away to other carriers and MVNOs, so now they're scrambling to find ways of preventing anymore revenue leak. I mean, after all, when each night since 2007 they've been dining on chateaubriand and wine, they're don't ever want to fall back on cheeseburgers and beer.

Every time this guy talks, he really is nothing more than a shark in a suit.

The funny thing about the "new" plans is that after crunching the numbers and comparing them to my current "antiquated" plan, I'm actually paying less for not really that much less than is offered on the "new" Data Share plans.
Yeah, that's really encouraging me to upgrade my service plan... Or not.

Hey there! A tweet from John Legere brought me here. That's pretty cool.

But anyway, anytime I see quotes from a wireless CEO not named John or Dan I just try and skim them for how I'll be screwed over in the upcoming year. The comments from those two usually at least are funny or somewhat honest from a certain perspective. In this case I Cliff-Noted Mr. Stephenson's remarks to say, "Poor us, but we'll give you back a tiny bit of the subsidy cost we'd normally build in to the plan in exchange for you paying the full cost of the device."

With the millions and billions of dollar profits these cell phone companies are making...they should be giving us these smartphones for free. AT & T has enough of a cash cow to give every one of it's customer's a free smartphone every year and STILL make a profit (maybe i'm going too far). It's just another way of making the executives' pockets even fatter than what they already are. Rich get richer and poor get poorer folks.

The reason the media jumps on this is because it fits the Apple D&G/FUD meme perfectly. In fact there was one financial click bait site that wrote a whole story about how Apple was finished as a company if the carriers ended smartphone "subsidies". If that's true then perhaps we need to say the same about Samsung? Their record profits didn't come until the Galaxy line of smartphones/phablets took off.

I would think that Samsung would be a tough nut to crack considering they have their fingers in so many different markets other than smart phones and computing.

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Wow Rene thanks. A great read (Monday Note). I knew carriers were 'sharks' the moment I did the same thing with an AT&T rep. Asked her if I get my iPhones upfront if they would be less to pay monthly? She apologetically answered I must add "no." Then the novice that I was, hadn't started reading iMore yet was like "you're nuts!" This is just a lot more corporate greed. And Stephenson and his cohorts want the public to think they are bleeding money. When you look at the crazy mobile phone bill we have to pay we end up definitely being shafted. I don't know why I remain surprised at the way popular media slants the news in favor of who pays their salaries. Duh?! It is refreshing to see some responsible journalism ever so often.

Just typical BS from carriers. They are raking in the profits and just look for another way to keep rate plans high while overcharging for everything and now not having to pay a small amount upfront that they make back 2-3fold the length of the contract

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Carrier contracts are barely short of organized crime. locking me into contractual agreements is not in anyway shape or form ethical the way it's carried out by cell phone carriers.