Will End of Smartphone Subsidies Actually Help Mobile Service Providers and Ecosystem?

It might seem self evident that smartphone subsidies are a burden for mobile service providers. If that is the case, getting rid of device subsidies should be financially helpful. 

And there is some evidence that operating income does improve when subsidies are ended.

After all, if a carrier buys devices from Apple at $660, on average, then requires consumers to pay $200 for the device, while recovering the balance of the device cost over the life of a two-year contract, then the carrier has to amortize the device cost over time, which has the effect of lowering operating income (some portion of revenue simply reflects a recovery of the upfront $460 difference between what the carrier paid for the device and the price the customer paid.

That is one reason why T-Mobile US has abandoned smartphone subsidies, and why other carriers are adding plans that achieve similar objectives.

Of course, the matter is more complicated. It is not clear how consumer behavior changes, if and when all consumers are required to pay full retail price for their devices, even when the advantage is lower monthly recurring fees for service.

Certainly many customers would find they do not want to spend $600 to $800 for a smartphone, or might not upgrade as often. Lower smart phone sales means lower data plan revenue.

The issue is how big the effect might be, though, now that a majority of users already use smartphones. Still, it is easy enough to predict that more users would shift to less-expensive devices and upgrade less often.

That would affect the fortunes of device suppliers and likely encourage suppliers to produce more models that are less costly.

That could lead to lower rates of software innovation and application development as well. Other ripple effects could include lower service provider equity prices (lower rates of revenue growth would lead to less robust retail share prices) and possibly less investment in the industry (rates of return would drop).

Perhaps it is indisputable that smartphone adoption and innovation have benefited from subsidies. The issue is how policies might change once adoption is nearly universal.