How Much Does "Ditching Phone Subsidies" Actually Change?

As T-Mobile USA and Verizon Wireless move to decouple recurring service plans from sales of devices, one question some might have is how those policies will affect service providers and consumers.

It isn’t so clear, even though some service providers tout “savings.”

For the carriers, separating device sales from recurring service plans allows them to market service plans at “lower cost,” since any installment payments or “device subsidies” are separated.

If installment plans are substituted for “device subsidies” to any great extent, that move alone will not markedly affect service provider operating costs or potential profit margins, though, since the carriers still will have to purchase the devices and then recover the costs over time.

It isn’t even so clear that most consumers will save money when device installment plans replace sales of subsidized devices. Recurring out of pocket costs might not be less under the new plans, compared to the older plans

It’s hard to ascertain the real prospects for actual movement by the U.S. federal government to mandate mobile phone unlocking in the U.S. market. Some argue that the benefits to consumers would be significant, as “phone unlocking” would create a  competitive situation more analogous to Europe.

Some might say the European experience with device unlocking is less useful in the U.S. market simply because the U.S. market has two major and incompatible air interfaces.

Even if all devices were sold “unlocked,” users would have less choice than in Europe, where all carriers use the GSM air interface.

Unlike many other countries, subscribers and networks are at the moment split into GSM (AT&T and T-Mobile USA) and CDMA (Verizon Wireless and Sprint) air interface camps. An unlocked CDMA device cannot be used on the AT&T and T-Mobile USA neteworks, while a GSM unlocked device cannot be used on the Verizon or Sprint networks.

Presumably, the value of unlocked devices will becomes a bigger actual value to consumers only when Long Term Evolution fourth generation networks are fully established in the U.S. market, and all LTE devices can be used on all U.S. networks.

But the matter is more complicated than often seems to be the case, in part because sale of unlocked devices might, or might not, affect end user behavior all that much. Carriers seem to recognize this by switching to installment plans, instead of requiring outright retail purchase prices.

Not many consumers are going to prefer shelling out full retail price for the latest Apple iPhone, even if they can afford to do so.

If all devices must be sold at full retail, basic economics suggests that people will trade down to cheaper devices, or stretch the amount of time they keep an existing device, if a switch to fully unlocked phones were to occur.

Installment plans now available from T-Mobile USA and Verizon Wireless address that issue.

The point is that the assumption mandatory unlocking would lead to “more choice and lower prices” is not as clear cut as might seem to be the case. 

It is the ability to get a new and “better” device every 18 months that might be the value consumers get from subsidized phones, whether unlocked or not. The installment plans might provide such value, at the same time heading off pressure to mandate device unlocking.

Nor is it clear that consumer device replenishment rates or demand for “used devices” will change, either way.

ReCellular is said to be one of the largest U.S.-based mobile phone refurbishers, reselling or recycling 5.2 million mobile devices in 2010.  ReCellular sells about 60 percent of its phones in the U.S. market and the rest mostly to dealers in Asia, Africa, Latin America and Eastern Europe.

But global sales of used phones total only a few hundred million units a year, estimates Andy Castonguay, an analyst at consulting firm Yankee Group. That compares with the 1.6 billion new devices sold worldwide in 2012.

Also, according to one U.S. study, the typical mobile device is used 18 months before being replaced. Whether that would be different, with separated device and service plans, is unclear.

At least for the moment, demand for sales of “unlocked” devices should be dampened by the growing trend to separate device subsidies from the cost of mobile service. The theory behind sales of unlocked devices is that consumers would see lower prices, and gain more freedom to switch providers.

The former should happen, in one sense. Consumers will see lower retail prices, if only because the hidden device subsidies are removed. For a while, the ability to switch providers, in the U.S. market, will be sharply limited because of differences of air interface.

Perhaps in an attempt to head off regulation that would force sale of “unlocked” devices, service providers are shifting in a direction that could provide greater buyer transparency, potential for some cost savings and greater freedom to switch providers, though not as much as backers of unlocked devices would prefer.