It’s Time To End or Change the Subsidy Business Model

me.jpgRecently Kevin Tofel of jkOnTheRun posted that he was looking for a data only plan from T-Mobile an he was disappointed that the options he was discovering all came with a 2 year contract. Other options do exist (if you read the comments to Kevin’s post you can see some suggestions.) But that’s not the point of this post.

It is an accepted way of life for consumers and carriers that 2 year contracts are a way of subsidizing handsets, modem cards, and now netbooks; bringing down the initial price point of purchasing the hardware. Unfortunately it is also accepted that we all know that we’re digging deeper into our pockets for a far bigger investment over two years of service on that contract. Given the “I want it now” culture we live in though we blithely go along with this. Of course there are Early Termination Fees for contracts (ETF) and that seems to hold a majority of folks in the carrier’s grasp, except for those who just have to switch for whatever reason. Inexplicably some of these ETF fees have risen lately, which makes no sense to me at all.

But Kevin’s predicament demonstrates that at least on one level this two year contract subsidy model isn’t tied to hardware and its costs. He was looking for just a SIM card so he could buy an unlocked phone. I don’t think anyone can imagine that a SIM card needs to be subsidized over two years. In this case the contract is just a way of locking Kevin in. Does this prove a lie? I wouldn’t go that far, but it does mean that the one sided contracts aren’t all they are made out to be. Quite frankly I think there is enough room in the pricing models for everybody to still make a profit if the subsidy model was changed.

Bottom line, it is time that the carrier’s reexamined their business models and focused on users and not devices. Carriers seemed to have decided that $60 a month is what they are going to charge us for a data plan using a modem or a MiFi card or a dedicated card in a device. Fine. Charge us each $60 a month (if we choose to play of course) and be done with it. But don’t tie it to a device, tie it to the user.

Of course this kind of thinking would destroy current business models and marketing efforts. But, those models are causing nothing but dissatisfaction and frustration among customers anyway. If I had a nickel for every time I heard someone say, yeah that looks like a great phone, or I’d love to get a MiFi card, or I’d be interested in one of those cheap netbooks, etc… and then follow it up with the punch line, but I don’t want another contract, or I have to wait until my current contract expires; I think I would have quite a few nickels.

Maybe I’m naive, but I would imagine carriers could start to build some sort of brand loyalty (assuming they do their jobs with their networks) this way. I think they would also see some customers buying more new hardware and I’m guessing less churn in the long run. One of the responses to this is always, but this will slow innovation. I think the opposite is true. Should a user be allowed to switch devices with some sort of impunity without paying a penalty, I think we’d see more innovation in the devices and software.

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Further, I’m guessing that should the carriers see some way to do this, many users would be willing to pay a higher monthly freight to participate. I know I would pay $75 or $80 a month if I had the ability to switch devices when I wanted.

Perhaps I just don’t understand the economics here, but I think the current models are outdated and lead to more issues than they solve in the long run.

Comments

  1. Tamas says

    I very much agree with Warner on this. Although the UK seems to be somewhat cheaper (I pay £10/month for internet, 300 mins and unlimited text) but in many cases the long contracts are more of a burden to carry. Especially for folks who can actually afford to keep up with the latest and greatest and don’t need any subsidy.

    I think one should have a choice between the current business model and what Warner is suggetsing – those who want a lower price, let them sign up for an extended period, but if you don’t want a long contract you should have an option for that as well.

  2. jeeves says

    Although the thoughts in your post are good, the biggest issue with them never seeing the light of day, is that all of the carriers are happy to lock in customers. Even if customers are frustrated and dissatisfied, where do they turn to? Switch from one carrier to another is simply no option.

    T-Mobile (being sort of the underdog amongst the big 4) seems to be attempting to rewrite the rules by introducing monthly plans. Only time will tell how much uptake will there be for T-Mobile with its aggressive new plans without contracts.

  3. Craig says

    I currently use Cricket with an unlimited plan (talk, text, internet) for about $45 after taxes without a contract. I got a Nokia Internet Tablet (n810) for under $200 that I can tether to the phone when I don’t have WiFi access. It requires 2 devices, (one a cheap phone), but it’s not a bad smartphone replacement. In fact, I’d guess that any bluetooth PDA could offer similar functionality.

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