Cell Phone Contracts & Contradictions

by on June 12, 2008 · 17 comments

Today I released a press statement about the Federal Communications Commission’s hearing today on early termination fees for customers who cancel their mobile phone, cable or Internet service contracts early. Quickly after the statement was released, I got reasoned response from Ken Werner, a Senior Analyst at Insight Media.

As reasoned as Ken’s response was, however, it just doesn’t make much sense. Ken argues that, ” bundling of phone and wireless services does not enhance competition; it suppresses it.” He goes on to say that “Unbundling of phone and service sales would create a far more varied and vibrant set of offerings.”

But this simply isn’t true. By forcing unbundling—that means banning subsidized phones—we’re taking away consumer choice. Being able to buy a phone outright and then purchase a plan on a month-to-month but if Ken is right and “Google, the Android open platform, the Open Handset Alliance, and (maybe) even Verizon are moving in that direction,” then there is no reason to force a no-contract model on the wireless industry.

The way to true offer a “more varied and vibrant set of offerings” is to allow the market to continue to operate as it is. Because of exceptional hardware like the iPhone, Ken is likely right that Verizon and other carriers will open up to selling plans separately from phones, but consumers should still be able to buy basic phones that are subsidized through long-term phone plan commitments. Banning the latter option decreases choice, rather than expanding it as Ken claims.

It may take times for American business models to shift, but ultimately it will result in more choice than markets like Europe, where choice is limited by contract negotiation. To say that banning contract options will increase the variety of options is simply a contradiction in terms.

  • http://linuxworld.com/community/ Don Marti

    Counterexample: Pre-breakup AT&T wasn’t allowed to license Unix to customers, so the variety of Unix options on the market was huge.

  • http://www.codemonkeyramblings.com MikeT

    It would be better to have a policy in place that says that if Apple does not get a written contract with its users, it cannot render their phone unusable based on a user’s relationship with AT&T. Meaning that if Apple doesn’t have a written contract with me that I signed at the Apple Store, and my plan runs out after a year, and I want to use my iPhone as a more capable iPod Touch, Apple cannot just shut off my property.

  • http://www.codemonkeyramblings.com MikeT

    Or cripple it.

    I don’t object to them refusing to activate it without a service, what I object to is the idea that if you get it activated one way or another, and they didn’t have a written contractual agreement with you on how you would use it, they cannot legally cripple or shut off your property.

  • http://www.codemonkeyramblings.com MikeT

    cannot should be “should not be able to”

  • http://linuxworld.com/community/ Don Marti

    Counterexample: Pre-breakup AT&T wasn’t allowed to license Unix to customers, so the variety of Unix options on the market was huge.

  • http://www.codemonkeyramblings.com MikeT

    It would be better to have a policy in place that says that if Apple does not get a written contract with its users, it cannot render their phone unusable based on a user’s relationship with AT&T. Meaning that if Apple doesn’t have a written contract with me that I signed at the Apple Store, and my plan runs out after a year, and I want to use my iPhone as a more capable iPod Touch, Apple cannot just shut off my property.

  • http://www.codemonkeyramblings.com MikeT

    Or cripple it.

    I don’t object to them refusing to activate it without a service, what I object to is the idea that if you get it activated one way or another, and they didn’t have a written contractual agreement with you on how you would use it, they cannot legally cripple or shut off your property.

  • http://www.codemonkeyramblings.com MikeT

    cannot should be “should not be able to”

  • http://craphound.com Cory Doctorow

    As Tim Wu has pointed out, if there’s a positive externality (more ready access to more powerful handsets) that arises from handset subsidy, then exactly the same externality could arise from phones sold on the installment plan — without forcing consumers to accede to having their most personal technology locked against them.

    The problem with handset locking is that it requires enforcement — at public expense — to prevent handset unlocking. It’s not a “natural market” — it’s one that requires extraordinary incursions into the marketplace by government. It asks a regulator to place a heavy thumb on the scales in favor of this model.

  • http://craphound.com Cory Doctorow

    As Tim Wu has pointed out, if there’s a positive externality (more ready access to more powerful handsets) that arises from handset subsidy, then exactly the same externality could arise from phones sold on the installment plan — without forcing consumers to accede to having their most personal technology locked against them.

    The problem with handset locking is that it requires enforcement — at public expense — to prevent handset unlocking. It’s not a “natural market” — it’s one that requires extraordinary incursions into the marketplace by government. It asks a regulator to place a heavy thumb on the scales in favor of this model.

  • Cord Blomquist

    Cory, I agree that customers could derive the same benefits from installment plans, but would such plans work in the market alongside phones tied to contracts?

    Imagine customers are faced with these choices:

    1) An $800 iPhone that requires $199 down payment and 24 monthly payments of $25. This phone is not tied to a plan.

    2) A $199 iPhone that is tied to a $60 a month data plan.

    I think the average consumers is still going to go for the second option simply because it seems cheaper. Voice and data plans for the phone are going to run around $50 anyway, so few customers would see the advantage of paying $25 + $50 when they could pay $60 per month and not be faced with the intimidating $800 price tag.

    Even if the phone were cheaper and it worked out that a monthly plan was worse for consumers many might still opt for the phone married to the contract because they aren’t met with an initial price tag that’s so high.

    I agree with you that the government should not be propping up failed anti-unlocking schemes. DRM, anti-unlocking software, and other such restrictions placed on technologies in order to get them to jive with existing business plans should be allowed in a free-market, but government should not come to the rescue of Apple when it’s schemes fail just as it shouldn’t prop-up the DRM on Blu-Ray players or anything else.

    I think DRM is going to go the way of the dinosaur along with DHM—digital handset management. But shouldn’t we let it do so on its own? I believe that the market will find its way to open cell phones, but I think there could also be a place for DHM devices for many years to come. Why not let all market niches be filled instead of demanding that everyone conform to the business model that best suites the needs of the uber-geeks?

  • http://www.cordblomquist.com cordblomquist

    Cory, I agree that customers could derive the same benefits from installment plans, but would such plans work in the market alongside phones tied to contracts?

    Imagine customers are faced with these choices:

    1) An $800 iPhone that requires $199 down payment and 24 monthly payments of $25. This phone is not tied to a plan.

    2) A $199 iPhone that is tied to a $60 a month data plan.

    I think the average consumers is still going to go for the second option simply because it seems cheaper. Voice and data plans for the phone are going to run around $50 anyway, so few customers would see the advantage of paying $25 + $50 when they could pay $60 per month and not be faced with the intimidating $800 price tag.

    Even if the phone were cheaper and it worked out that a monthly plan was worse for consumers many might still opt for the phone married to the contract because they aren’t met with an initial price tag that’s so high.

    I agree with you that the government should not be propping up failed anti-unlocking schemes. DRM, anti-unlocking software, and other such restrictions placed on technologies in order to get them to jive with existing business plans should be allowed in a free-market, but government should not come to the rescue of Apple when it’s schemes fail just as it shouldn’t prop-up the DRM on Blu-Ray players or anything else.

    I think DRM is going to go the way of the dinosaur along with DHM—digital handset management. But shouldn’t we let it do so on its own? I believe that the market will find its way to open cell phones, but I think there could also be a place for DHM devices for many years to come. Why not let all market niches be filled instead of demanding that everyone conform to the business model that best suites the needs of the uber-geeks?

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