What if I told you that from now on, you could only buy a computer from an Internet service provider (ISP), the ISP would give you a huge discount on the price of the computer in exchange for you signing a 2-year contract with them, and the computer would only be able to access the Internet when you connect through them — if your school, favourite coffee shop or friend’s house don’t use the same ISP, then you wouldn’t be able to connect to the Internet from those places. Chances are, you would be outraged. And your outrage would be justified. But that’s basically what happens when you buy a subsidized phone. And it’s doing more harm than good to the market and consumers.
The most obvious problem with subsidized phones, and by far the most talked-about one, is that it locks your phone to a carrier, preventing you from using it on another carrier’s network. That lock in eliminates the carriers’ need to compete for your business, and you know what happens to prices and service quality when that happens.
Another big problem with phone subsidies is that the upfront prices of the subsidized phones are usually below cost, which effectively keeps independent retailers, like Amazon, out of the market — or relegates them to simply reselling carrier device/service packages, or selling to those consumers who are willing to buy unsubsidized phones — since they can’t sell the phones at, or below, cost. In Canada and the US, most people buy subsidized phones, which means much less competition in the retail sale of phones, which almost always results in higher prices and less choice (less phones to choose from). It also effectively puts the carriers in charge of determining the retail price of phones. And who would you rather have setting the retail prices of phones: retailers like Amazon or the carriers ?
Yet another problem with phone subsidies is it reduces phone makers’ incentive for lowering prices. Why would phone makers want to lower their prices when they know people can get a $750 phone for $300 ? Think of the number of iPhone users who can’t afford to buy an iPhone at full price. Now imagine what would happen to Apple if those users switched to a more affordable platform, like BlackBerry10, because carriers weren’t offering subsidies anymore.
Finally, buying a subsidized phone is usually less affordable than buying an unsubsidized phone. Carriers always emphasize how affordable subsidized phones are, but that affordability is a wolf in sheep’s clothing. Many people have crunched the numbers showing how buying subsidized phones is more expensive for consumers in the longer term (1-2 years). BlackBerry recently published their own analysis too. It becomes especially obvious when you consider that several carriers offer discounts on your monthly service rate if you sign up for a service plan without buying a subsidized phone.
Some people will say “Yeah, but I can’t afford to pay the full price of an unsubsidized phone up front.”, which is true for many people. But in that case, you can simply finance the cost of your phone. “Financing ?! No way ! I’m not going into debt for a phone.”. Well, truth be told, when you buy a subsidized phone, you are going into debt to buy the phone. You just don’t realize it because the loan amount is presented as a discount on the price of the phone, and the loan payments are rolled into your monthly service fee so you don’t see them. It’s a hidden loan. Plus, there are financing options available. American consumers are especially fortunate, since AT&T and Verizon offer financing with $0 down payment and 0% interest over 24 months, and they’ll reduce your monthly rate if you do finance your phone with them. And then there’s PayPal Credit, which is available when you buy from ShopBlackBerry. Once more people stop buying subsidized phones and start looking for financing options, you can be sure more businesses will start offering financing options. If there’s a dollar to be made, you can bet there will be people eager to make that dollar.
So with more and more companies offering financing options for phones, and more and more phone makers selling phones directly to consumers, there’s really no reason to buy a subsidized phone, and little reason to buy the phone from a carrier. That’s especially true now that BlackBerry is selling their award-winning phones directly to consumers online in many countries, and with PayPal Credit financing for US customers. Why wait for a carrier to get the best phones on the market, when you can get them directly from BlackBerry or Amazon ?
In the end, you can choose the blue pill, and be locked into a world where you are controlled by the carrier, or you can take the red pill and live freely. The choice is yours.