A Shift in the Balance of Power Between Wireless Carriers and Subscribers

            Today’s Wall Street Journal reports that wireless carriers have begun to reduce the subsidies they offer wireless subscribers.  See http://online.wsj.com/article/SB10001424052702304020104577384562576617618.html.
This maneuver occurs at the very same time as carriers have raised their data plan rates resulting in an increase in the major financial metric used by the industry: Average Revenue per User.

            A fair minded person, putting the pieces together, would conclude that the industry is becoming less competitive and acts in parallel, i.e., carriers collectively engage in the same conduct as to the major terms, conditions and prices for service.   Bear in mind that no carrier has announced a reduction in service rates as a result of reduced subsidy burdens.  No carrier has to do so, including languishing Sprint and T-Mobile.

            The ubiquitous excuse for all things bad in the wireless industry—spectrum scarcity—has nothing to do with the extent carriers have to offer handset subsidies.  Moreover if one considers the wireless marketplace as nearing maturity in terms of market penetration, shouldn’t carriers have to sharpen their pencil to offer better deals and a more compelling value proposition for laggards?  Apparently not.

            The leading buy side telecom financial analyst, Craig Moffett of Berstein Research predicts “a more disciplined and more profitable future” for carriers, no doubt at the expense of consumer surplus.

Why Is Your Smart Phone Is So Stupid?

Brian Caulfield of Forbes magazine wrote a short piece posing the question: Why Is Your Smart Phone Is So Stupid? See http://www.forbes.com/2009/07/08/iphone-ericsson-mobile-intelligent-technology-iphone.html?partner=telecom_newsletter. He answers the question by reporting that the carriers disable the handsets in an attempt to prevent revenue drainage which would occur, for example, if iPhone subscribers could use Skype outside of the islands of Wi-Fi access.

Mr. Caulfield also suggests that handset lock downs and lock outs constitute the price we pay for subsidized handsets. Okay so far. But he concludes with the view that consumers simply will not pay for unsubsidized handsets and as a result insufficient numbers of such devices exist to encourage applications engineers to write programs for them.

First, make no mistake about it: wireless subscribers surely do pay for their handsets. Wireless carriers do not operate as charities and price their services so that they recoup the subsidy. As I have noted previously, one cannot get discounted service even when using unsubsidized handsets. Second, wireless carriers recognize that they can reduce churn and price sensitivity when they lock subscribers in for two years by offering a “sweet” deal for the latest and greatest handset. Better yet, these new devices have features that might generate additional revenues.

At best wireless carriers are co-dependent, facilitators of Mr. Caulfield’s observation that no one will pay “full price” for a smart phone. At worse, these carriers deliberately dumb down the wireless experience to reduce expectations of what such networks can offer and what handsets can do.

Anyone who has traveled to Asia marvels at the digital divide in handset functionality. Might the lack of features and functionality adversely affect national productivity, or are we just better off for not having many of the standard features Asian handsets offer?

Such a Deal: Wireless Service Without a 2 Year Commitment

Today’s Wall Street Journal (at B5B) reports that Verizon Wireless will now allow subscribers to buy unsubsidized handsets in exchange for which subscribers can avoid a two year service commitment. Before you consider this a major concession to consumer sovereignty recognize that Verizon has not announced a discounted service rate to reflect the elimination of a handset subsidy obligation.

The WSJ article notes that Verizon will sell a Blackberry handset for $430 in lieu of the subsidized price of $100. Because Verizon surely does not operate as a charity, the two year service commitment required of subscribers acquiring a subsidized handset, has at least a value of $330 to both Verizon and subscribers. Verizon must build in its monthly service rate sufficient revenue to recoup the $330 over two years. Subscribers slowly pay back the $330 handset subsidy through higher service rates.

When someone becomes a Verizon subscriber using an unsubsidized handset, these subscribers in effect pay a surcharged rate of at least $165 annually by foregoing a handset subsidy yet paying the same rate as handset subsidized subscribers.

Such a deal.