5 ms·

The carriers sell the phones for less and make money back through the service plan. That's the basic model for carriers offering phone subsidies.

by fvrghl 13y ago

muyuu 13y ago
Not sure about Russia, but in other countries there are tight regulations for phone subsidies (treating them for what they are: dumping of retail price with the purpose of locking in users - a blatantly anticompetitive practice that would be illegal in most industries). Strong competition has a similar effect. If the SIM free contracts are good enough, people are not going to get into lengthy, expensive contracts. This doesn't happen in places like the US because there's a very strong cartel/oligopoly there that affords them the right to simply deny you a terminal if it's not under the carrier's conditions. If Apple is selling for cheaper than the carriers can afford to sell, then they will simply do what they are doing: stop selling it.
- jdminhbg 13y ago
  > dumping of retail price with the purpose of locking in users - a blatantly anticompetitive practice that would be illegal in most industries What? There are scores of industries that use loss-leaders to get customers to commit to long-term contracts. Razors, satellite/cable TV, etc. > This doesn't happen in places like the US because there's a very strong cartel/oligopoly there that affords them the right to simply deny you a terminal if it's not under the carrier's conditions. This isn't true at all, and I don't know why you would think it was. Here's a counterexample: https://ting.com/ https://ting.com/
  - PeterisP 13y ago
    Exactly, forcing a lock-in is illegal in all those industries as well. For razors: you are allowed to manufacture and market blades that are compatible with competitors; so people are (both legally and practically) allowed to buy a loss-leader razor from company A, and cheaper razorblades from company B. For satellite/cable TV: in places with decent consumer rights laws there are practical, massively used ways to get out of long-term lock-ins; so such deals work only as long as consumers like the deal. If customer walks away, there may be a contract-breaking fee involved, but as soon as you want to change the contract the slightest bit not to customer's favor (increase price by a dollar or drop a TV channel, which you may need to do) - bam; the customer can walk away with no fees.
  - kvb 13y ago
    Loss leading may actually be harmful to consumers. See http://afinetheorem.wordpress.com/2013/07/12/loss-leading-as-an-exploitative-practice-z-chen-p-rey-2012/ http://afinetheorem.wordpress.com/2013/07/12/loss-leading-as... for one readable explanation.
- Dylan16807 13y ago
  How is selling you something on credit 'anticompetitive'?
  - abrahamsen 13y ago
    Danish (and I believe EU) regulation has a comprise. Subsidized phones are legal, but 1) the longest time you can be bound by a "plan" is 6 month, and 2) all advertising must include the total cost of ownership in the binding period. This makes it blatantly obvious to the consumer that the unsubsidized phones are cheaper.
  - pessimizer 13y ago
    Because that's not what they're doing? I can buy a car on credit, and it has nothing to do with my wireless service. I don't have to commit for the next two years to only buying gasoline from a particular type of station, either.
  - PeterisP 13y ago
    Selling on credit is different than offering a loss leader and making it up elsewhere. If they are "selling you the phone on credit", then it would be obvious to require (a) in bill, separate items for the telecommunications and for the phone payment; (b) in advertising, note the full price of the phone, including the all monthly payments+interest; (c) when the phone is paid in full (24 months?), then stop charging for it... rather than continuing the same bill forever.
specialp 13y ago
In the USA this is the predominant model. In Europe and Russia customers prefer to buy a SIM unlocked phone and not have a contract. These carriers were getting killed selling subsidized iPhones because it is far cheaper to import an unlocked one and pay less monthly. T-Mobile is doing this in the USA now and eventually people will learn that that "$199" iPhone is not 199 when you are paying $30-40 more a month over T-Mobile unsubsidized cost forever.
chmodd 13y ago
mobile contracts are very rare in Russia, almost everyone is on a prepaid plan
prostoalex 13y ago
Russian market is primarily prepaid.
Adirael 13y ago
It varies country to country. That was the norm for Spain but has since changed, now you get two contracts, one for the service and another for the phone financing. I pay 25/mo for my iPhone plus an 8/mo data plan. I don't do much calls but they're 8/c minute IIRC. I can move from a plan to another or cancel the data but the 25/mo will stay there until the phone it's paid. It was 50€ cheaper to buy it this way than to pay full retail price.
- erichurkman 13y ago
  > It was 50€ cheaper to buy it this way than to pay full retail price. What's the reasoning behind that for the phone vendor? That seems odd.
  - PeterisP 13y ago
    1) There is some "lock-in" even without lock-in - some phone subsidies work even if people can leave because they don't leave that much anyways; think of it as advertising expense for customer acquisition. 2) There are economies of scale (order size) and synergies (sell phones at the same office you already have for contract sales) that can mean that $RANDOM_TELECOMPANY has significantly lower costs than $RANDOM_PHONE_RETAILER and can simply outcompete them on price.
    - tsotha 13y ago
      >There is some "lock-in" even without lock-in - some phone subsidies work even if people can leave because they don't leave that much anyways; think of it as advertising expense for customer acquisition. Yes. Carriers in the US lose, literally, billions of dollars on the iPhone because they've calculated the cost of acquiring a customer is a few hundred bucks, on average, so if subsidizing a phone buys you customers it's worth it. Personally, I think they've gone overboard, but then again I'm not in the front office. http://www.latimes.com/business/money/la-fi-tn-verizon-on-hook-for-billions-in-missing-iphones-sales-report-states-20130710,0,7933563.story http://www.latimes.com/business/money/la-fi-tn-verizon-on-ho...
PeterisP 13y ago
In a proper free market they can't really do that, as I can buy a handset through operator A and immediately switch (with no penalties allowed) to a cheaper operator B. If there is no legal/monopolistic lock-in like in USA (where the phone is locked to a certain operator), but instead operator B can jailbreak&unlock your phone for you when you switch, then you can't extract huge monthly prices just because you sold a phone 9 months ago.
- icebraining 13y ago
  Pretty sure free markets are supposed to allow for contracts. "No penalties allowed" is clearly government regulation (one I happen to appreciate).
  - PeterisP 13y ago
    Yes, true. However, even with no regulation at all, you might owe some contract penalty, but you still be able to use that phone with any operator after contract expiry or breaking. The "zero point" of regulation would mean that any and all device restrictions can be freely legally broken and removed, which currently isn't the case in USA; in unregulated markets there are thriving legal businesses that do, for example, jailbreaks of phones that people bring in from USA, and which were subsidised there.
  - emn13 13y ago
    I think the issue of contracts is somewhat orthogonal to a market. Of course you need to be able to deal, but the details of that aren't somehow fundamental to a market. The point of a market is to allow sufficient flexibility so that lots of individual actors can by trial and error find an efficient solution to a hard problem without requiring a benevolent genius at the center. How much flexibility is enough? How much is too much? I don't think there's a one-size fits all solution here, and the size discrepancy between the cellular provider and the individual user only makes it harder. Personally, I think that in most markets, but particular these kind of highly asymmetric ones, we'd see more innovation and progress if the market were more fluid; which suggests to me that the carrier (and handset provider) lock-in is not a good thing.
d2vid 13y ago
FTA: "notably, Russia bans handset subsidies"

The carriers sell the phones for less and make money back through the service plan. That's the basic model for carriers offering phone subsidies.

by fvrghl 13y ago

The carriers sell the phones for less and make money back through the service plan. That's the basic model for carriers offering phone subsidies.

muyuu 13y ago

Not sure about Russia, but in other countries there are tight regulations for phone subsidies (treating them for what they are: dumping of retail price with the purpose of locking in users - a blatantly anticompetitive practice that would be illegal in most industries). Strong competition has a similar effect. If the SIM free contracts are good enough, people are not going to get into lengthy, expensive contracts. This doesn't happen in places like the US because there's a very strong cartel/oligopoly there that affords them the right to simply deny you a terminal if it's not under the carrier's conditions. If Apple is selling for cheaper than the carriers can afford to sell, then they will simply do what they are doing: stop selling it.

jdminhbg 13y ago
> dumping of retail price with the purpose of locking in users - a blatantly anticompetitive practice that would be illegal in most industries What? There are scores of industries that use loss-leaders to get customers to commit to long-term contracts. Razors, satellite/cable TV, etc. > This doesn't happen in places like the US because there's a very strong cartel/oligopoly there that affords them the right to simply deny you a terminal if it's not under the carrier's conditions. This isn't true at all, and I don't know why you would think it was. Here's a counterexample: https://ting.com/ https://ting.com/
- PeterisP 13y ago
  Exactly, forcing a lock-in is illegal in all those industries as well. For razors: you are allowed to manufacture and market blades that are compatible with competitors; so people are (both legally and practically) allowed to buy a loss-leader razor from company A, and cheaper razorblades from company B. For satellite/cable TV: in places with decent consumer rights laws there are practical, massively used ways to get out of long-term lock-ins; so such deals work only as long as consumers like the deal. If customer walks away, there may be a contract-breaking fee involved, but as soon as you want to change the contract the slightest bit not to customer's favor (increase price by a dollar or drop a TV channel, which you may need to do) - bam; the customer can walk away with no fees.
- kvb 13y ago
  Loss leading may actually be harmful to consumers. See http://afinetheorem.wordpress.com/2013/07/12/loss-leading-as-an-exploitative-practice-z-chen-p-rey-2012/ http://afinetheorem.wordpress.com/2013/07/12/loss-leading-as... for one readable explanation.
Dylan16807 13y ago
How is selling you something on credit 'anticompetitive'?
- abrahamsen 13y ago
  Danish (and I believe EU) regulation has a comprise. Subsidized phones are legal, but 1) the longest time you can be bound by a "plan" is 6 month, and 2) all advertising must include the total cost of ownership in the binding period. This makes it blatantly obvious to the consumer that the unsubsidized phones are cheaper.
- pessimizer 13y ago
  Because that's not what they're doing? I can buy a car on credit, and it has nothing to do with my wireless service. I don't have to commit for the next two years to only buying gasoline from a particular type of station, either.
- PeterisP 13y ago
  Selling on credit is different than offering a loss leader and making it up elsewhere. If they are "selling you the phone on credit", then it would be obvious to require (a) in bill, separate items for the telecommunications and for the phone payment; (b) in advertising, note the full price of the phone, including the all monthly payments+interest; (c) when the phone is paid in full (24 months?), then stop charging for it... rather than continuing the same bill forever.

specialp 13y ago

In the USA this is the predominant model. In Europe and Russia customers prefer to buy a SIM unlocked phone and not have a contract. These carriers were getting killed selling subsidized iPhones because it is far cheaper to import an unlocked one and pay less monthly. T-Mobile is doing this in the USA now and eventually people will learn that that "$199" iPhone is not 199 when you are paying $30-40 more a month over T-Mobile unsubsidized cost forever.

chmodd 13y ago

mobile contracts are very rare in Russia, almost everyone is on a prepaid plan

prostoalex 13y ago

Russian market is primarily prepaid.

Adirael 13y ago

It varies country to country. That was the norm for Spain but has since changed, now you get two contracts, one for the service and another for the phone financing. I pay 25/mo for my iPhone plus an 8/mo data plan. I don't do much calls but they're 8/c minute IIRC. I can move from a plan to another or cancel the data but the 25/mo will stay there until the phone it's paid. It was 50€ cheaper to buy it this way than to pay full retail price.

erichurkman 13y ago
> It was 50€ cheaper to buy it this way than to pay full retail price. What's the reasoning behind that for the phone vendor? That seems odd.
- PeterisP 13y ago
  1) There is some "lock-in" even without lock-in - some phone subsidies work even if people can leave because they don't leave that much anyways; think of it as advertising expense for customer acquisition. 2) There are economies of scale (order size) and synergies (sell phones at the same office you already have for contract sales) that can mean that $RANDOM_TELECOMPANY has significantly lower costs than $RANDOM_PHONE_RETAILER and can simply outcompete them on price.
  - tsotha 13y ago
    >There is some "lock-in" even without lock-in - some phone subsidies work even if people can leave because they don't leave that much anyways; think of it as advertising expense for customer acquisition. Yes. Carriers in the US lose, literally, billions of dollars on the iPhone because they've calculated the cost of acquiring a customer is a few hundred bucks, on average, so if subsidizing a phone buys you customers it's worth it. Personally, I think they've gone overboard, but then again I'm not in the front office. http://www.latimes.com/business/money/la-fi-tn-verizon-on-hook-for-billions-in-missing-iphones-sales-report-states-20130710,0,7933563.story http://www.latimes.com/business/money/la-fi-tn-verizon-on-ho...

PeterisP 13y ago

In a proper free market they can't really do that, as I can buy a handset through operator A and immediately switch (with no penalties allowed) to a cheaper operator B. If there is no legal/monopolistic lock-in like in USA (where the phone is locked to a certain operator), but instead operator B can jailbreak&unlock your phone for you when you switch, then you can't extract huge monthly prices just because you sold a phone 9 months ago.

icebraining 13y ago
Pretty sure free markets are supposed to allow for contracts. "No penalties allowed" is clearly government regulation (one I happen to appreciate).
- PeterisP 13y ago
  Yes, true. However, even with no regulation at all, you might owe some contract penalty, but you still be able to use that phone with any operator after contract expiry or breaking. The "zero point" of regulation would mean that any and all device restrictions can be freely legally broken and removed, which currently isn't the case in USA; in unregulated markets there are thriving legal businesses that do, for example, jailbreaks of phones that people bring in from USA, and which were subsidised there.
- emn13 13y ago
  I think the issue of contracts is somewhat orthogonal to a market. Of course you need to be able to deal, but the details of that aren't somehow fundamental to a market. The point of a market is to allow sufficient flexibility so that lots of individual actors can by trial and error find an efficient solution to a hard problem without requiring a benevolent genius at the center. How much flexibility is enough? How much is too much? I don't think there's a one-size fits all solution here, and the size discrepancy between the cellular provider and the individual user only makes it harder. Personally, I think that in most markets, but particular these kind of highly asymmetric ones, we'd see more innovation and progress if the market were more fluid; which suggests to me that the carrier (and handset provider) lock-in is not a good thing.

d2vid 13y ago

FTA: "notably, Russia bans handset subsidies"