Wireless Accounting Fiction

by on July 20, 2007 · 8 comments

Tom Lee says I’m missing the point about the iPhone:

But the point Ars is making is that the iPhone actually isn’t being subsidized by the contract fees. Consumers are buying the hardware at full retail price and being locked into a contract. This puts the lie to the carriers’ argument that early termination fees are in place to avoid losses over hardware subsidies — they charge the fees whether there’s a subsidy or not (and only one carrier will prorate this fee).

To paraphrase Yglesias, terms like “full retail price” and “subsidized” are a kind of accounting fiction. What matters is how many dollars come out of your pocket and how many end up in the pockets of AT&T and Apple. The label on the credit card bill, and exactly when the charge is made, just isn’t that important. Consider the following four scenarios:

Scenario 1:

  • Apple charges $500 for an iPhone
  • AT&T service costs $60/month
  • Apple gets $5/month from AT&T for every iPhone customer.


Scenario 2:

  • Apple charges $500 for an iPhone
  • AT&T service costs $60/month
  • AT&T pays Apple a lump sum of $120 for every 2-year iPhone contract they sign up.

Scenario 3:

  • Apple charges $620 for an iPhone
  • AT&T service costs $60/month
  • AT&T buys iPhones from Apple at full price and re-sells them to customers for $500, with a 2-year contract, eating the difference.

Scenario 4:

  • Apple charges $620 for an iPhone
  • AT&T service costs $60/month
  • Consumers buy full-price phones, but AT&T offers them an instant $120 rebate when they sign up for a 2-year service contract.

I don’t know how we’d go about determining which of these scenarios involves a “subsidized” iPhone and which ones involve an “unsubsidized” one with consumers paying the “full retail price.” They all involving the same amount of money coming out of the customer’s pocket and going into the pockets of AT&T and Apple. I don’t see how questions of justice can turn on these sorts of accounting details.

Is it annoying that Apple won’t sell you an iPhone without a 2-year contract? Absolutely. But not every annoyance in life calls for a regulatory solution. This is, in fact, a pretty competitive and fast-changing marketplace. Cell phone companies are responding to consumer demands—witness T-Mobile’s recent announcement of a WiFi/cell handoff service, for example. Obviously, it would be great if things would improve even faster, but there’s no reason to think that getting the FCC—an agency that’s not exactly known for either its alacrity or its unswerving dedication for consumers’ interests—more involved will improve matters.

  • Mike Sullivan

    “Is it annoying that Apple won’t sell you an iPhone without a 2-year contract? Absolutely.”

    Slight correction: Apple will sell you an iPhone without any contract at all. You walk out of the store with your very own iPhone after paying the $600 or so. It’s all yours. In order to activate it the way it’s intended, you need to set up a 2-year contract. And some experimenters have found ways to activate the iPhone (but not all of its features) without a contract.

  • http://www.techliberation.com/ Tim Lee

    Well, right, Apple does its best to make the iPhone a paperweight until you sign up for an contract with AT&T. But that’s not quite the same as not selling it to you at all.

  • http://www.wbklaw.com Mike Sullivan

    “Is it annoying that Apple won’t sell you an iPhone without a 2-year contract? Absolutely.”

    Slight correction: Apple will sell you an iPhone without any contract at all. You walk out of the store with your very own iPhone after paying the $600 or so. It’s all yours. In order to activate it the way it’s intended, you need to set up a 2-year contract. And some experimenters have found ways to activate the iPhone (but not all of its features) without a contract.

  • Tom Coseven

    Hardware/service lock-in not unique to the mobile phone market. It is pervasive across most of telecom Tivo does its best to make the DVR a paper weight if you drop the service. Akimbo did make the RCA STB a paper weight when it changed its business model. Cable and Satellite STB’s purchased by consumers are useless if you change technology. Cable and DSL modems purchased by consumers are also useless if you change technology.

    Outside of telecom, I can’t think of a consumer service that requires that customers buy locked hardware. PC’s, Mac’s, Game consoles, printers, dvd players all require product-specific software or ink, but they don’t stop functioning if you stop paying for a service.

  • http://www.techliberation.com/ Tim Lee

    Well, right, Apple does its best to make the iPhone a paperweight until you sign up for an contract with AT&T.; But that’s not quite the same as not selling it to you at all.

  • Tom Coseven

    Hardware/service lock-in not unique to the mobile phone market. It is pervasive across most of telecom Tivo does its best to make the DVR a paper weight if you drop the service. Akimbo did make the RCA STB a paper weight when it changed its business model. Cable and Satellite STB’s purchased by consumers are useless if you change technology. Cable and DSL modems purchased by consumers are also useless if you change technology.

    Outside of telecom, I can’t think of a consumer service that requires that customers buy locked hardware. PC’s, Mac’s, Game consoles, printers, dvd players all require product-specific software or ink, but they don’t stop functioning if you stop paying for a service.

  • John Bergmayer

    Termination fees aren’t my favorite, but I can live with them (for reasons below). Hardware locking I find unjust. Why can’t I buy the iPhone, pay the termination fee, and skedaddle over to T-Mobile? Why is hardware locking allowed–if it’s *my* phone, what right does the original owner still have to exercise dominion over it? Just like when you buy a building the old owner must hand over all the keys, when you buy a piece of hardware, any and all locks and codes associated with it need to be handed over to you. This isn’t unnecessary government regulation–it’s the enforcement of a fundamental tenet of property law.

    I have a feeling that if hardware locking went away and movement between carriers became simpler, some of the more egregious termination fees would just wither away. So I think they’re the wrong place to attack, even if you don’t like them. As it is, lots of people are doubly locked into their carriers: They have to pay the termination fees AND buy a new phone to use on the new network–which will also carry with it a contract. A cycle that cannot be escaped. Since not as many people do switch carriers after becoming established with one, there’s less of an outcry against the termination fees, and people, not expecting to switch often, don’t make their initial purchasing decisions based on them.

    Wireless Carterfone can also be understood along similar principles. It’s *your* service. You should be able to do with it what you will. You can attach any computer to the Internet and any electrical device to the grid–you just have to pay for your bandwidth and your juice, and you can’t take down the network with an unsafe device. The wireless market is only different because there needs to be some cooperation from the network side to get the device working–imagine if you had to call the power company to get them to “activate” a toaster. Would you like it very much if they decided that they would only activate appliances you bought from them? The fact that the practical nature of the way wireless networks work gives the carriers the opportunity to interject themselves right at this point doesn’t mean it’s a good idea. I think when we remember that the carriers are given government-backed monopoly licenses over spectrum which may not even be technologically necessary, and when we remember that they have the legal, government-granted authority to block out even noninterfering uses of “their” spectrum, a requirement that they activate any nonharmful device–for their paying customers!– is not asking for much.

    ps: I think Apple probably had pretty good reasons to go with AT&T–probably having to do with revenue-sharing and ease of setup. But there is a canard that I keep hearing repeated that I don’t think holds up, which is that visual voicemail is a service that requires active cooperation between the carrier and the handset maker. Sure, it *can* work that way. But the example of CallWave shows it doesn’t *have* to.

  • John Bergmayer

    Termination fees aren’t my favorite, but I can live with them (for reasons below). Hardware locking I find unjust. Why can’t I buy the iPhone, pay the termination fee, and skedaddle over to T-Mobile? Why is hardware locking allowed–if it’s *my* phone, what right does the original owner still have to exercise dominion over it? Just like when you buy a building the old owner must hand over all the keys, when you buy a piece of hardware, any and all locks and codes associated with it need to be handed over to you. This isn’t unnecessary government regulation–it’s the enforcement of a fundamental tenet of property law.

    I have a feeling that if hardware locking went away and movement between carriers became simpler, some of the more egregious termination fees would just wither away. So I think they’re the wrong place to attack, even if you don’t like them. As it is, lots of people are doubly locked into their carriers: They have to pay the termination fees AND buy a new phone to use on the new network–which will also carry with it a contract. A cycle that cannot be escaped. Since not as many people do switch carriers after becoming established with one, there’s less of an outcry against the termination fees, and people, not expecting to switch often, don’t make their initial purchasing decisions based on them.

    Wireless Carterfone can also be understood along similar principles. It’s *your* service. You should be able to do with it what you will. You can attach any computer to the Internet and any electrical device to the grid–you just have to pay for your bandwidth and your juice, and you can’t take down the network with an unsafe device. The wireless market is only different because there needs to be some cooperation from the network side to get the device working–imagine if you had to call the power company to get them to “activate” a toaster. Would you like it very much if they decided that they would only activate appliances you bought from them? The fact that the practical nature of the way wireless networks work gives the carriers the opportunity to interject themselves right at this point doesn’t mean it’s a good idea. I think when we remember that the carriers are given government-backed monopoly licenses over spectrum which may not even be technologically necessary, and when we remember that they have the legal, government-granted authority to block out even noninterfering uses of “their” spectrum, a requirement that they activate any nonharmful device–for their paying customers!– is not asking for much.

    ps: I think Apple probably had pretty good reasons to go with AT&T–probably; having to do with revenue-sharing and ease of setup. But there is a canard that I keep hearing repeated that I don’t think holds up, which is that visual voicemail is a service that requires active cooperation between the carrier and the handset maker. Sure, it *can* work that way. But the example of CallWave shows it doesn’t *have* to.

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