Google, Nexus One, Subsidized Handsets & Consumer Choices

by on May 14, 2010 · 9 comments

Google has just announced that it is ending web-only sales of its unsubsidized Nexus One smartphone. The company had hoped to created a very different kind of business model for mobile phone retailing, but it just didn’t work and so they are ending the experiment.

There are a couple of reasons that it probably didn’t work, but the one thing that just about everyone is pointing back to is the difficulty of acclimating Americans to the actual cost of an unsubsidized handset. Over at Ars Technica, Peter Bright points out:

A one-off payment of $529 is hard to stomach. In many countries, we’re not accustomed to paying so much for mobile phones, as normally their true cost is hidden—we pay less up front and commit to paying a monthly fee for 12-24 months. Only those brave souls who were willing to stump up for the early termination fee would get any idea of the true cost of their handset. In a world of subsidized handsets, then, the Nexus one felt very expensive. It’s true that SIM-only contracts are cheaper than with-handset ones, but the difference rarely feels significant enough to justify buying a full-price phone—much better to pay a little bit more each month and avoid the up-front cost. Even if you do the math and work out that the Google way is cheaper, there’s still the unpleasant prospect of spending so much at once.

And Kevin C. Tofel of GigaOm concludes:

it seems clear that the majority of U.S. consumers still aren’t ready to adopt the unsubsidized handset model that Europe and other areas use. People here gripe about their 2-year contracts, but aren’t willing to go contract free by paying full price for a new handset. I’m done griping, as evidenced by my own purchase of a Nexus One for $529 in January. I have the freedom to switch phones or carriers without an ETF, or Early Termination Fee, and I pay $20 a month less for my plan than a subsidized customer does for the same plan. Either I’m still in the minority or I was raised in Europe in a past life.

They’re right. We Americans are somewhat hooked on subsidized handsets, even if the math doesn’t make sense in the long-term. But is there anything wrong with this value preference? In my opinion, this is just another of the many value judgments that many people make — and which I do not necessarily share — but which are perfectly understandable.  We Americans are a pretty demanding lot, and when we want something, we usually want it right now–and at the cheapest up-front cost we can get. [That might be why we are hooked on credit cards–and debt!]

However, if you were to believe some of the ranting and regulatory pleadings of academics like Tim Wu and analysts at the New America Foundation and Public Knowledge, the lack of unsubsidized and unlocked phone options is the sign of massive market failure. They’ve called for all sorts of heavy-handed regulatory intervention into the wireless marketplace on these grounds and others, which all been subsequently shown to be pure bunk.

In the case of subsidized handsets, they essentially wanted mandatory unbundling of handsets and an end to exclusive contracts that gave us a nice phone at a dirt-cheap price up-front, so long as we took the 2-3 year service contract. Contracts like these exist in countless other markets, of course, but the regulatory advocates wanted us to believe that in the mobile marketplace this constituted an egregious harm that should be remedied by regulatory intervention.  But as Cord Blomquist pointed out here back in 2008, “forcing unbundling… means banning subsidized phones [which is] taking away consumer choice.”  Exactly right. Why shouldn’t we have the right to choose subsidized handsets even if they cost us a bit more in the long-run?

Regardless, Google’s experiment with the Nexus One certainly has something to teach us here, no? I mean, if Tim Wu, New America Foundation and Public Knowledge would have been right, people should have flocked to this model in droves. But they didn’t. It failed. And it can’t be because of the quality of the underlying product. Just about everyone agrees that the Nexus One is a best-in-class phone, or something close to it. And I doubt it’s because people needed to “kick the tires” and play with the phone first. Tons of people have ordered iPhones and Droids sight unseen.  Some have also suggested that Google’s customer support wasn’t up to snuff. I’d have no idea if that’s true, but that might be plausible reason for lack of uptake.

At the end of the day, however, it’s hard to avoid the sticker shock associated with an up-front payment of $529. That’s really difficult for some people to swallow — and it’s also why subsidized phones are likely here to stay.  And that’s certainly not cause for concern or regulatory intervention.

  • balleyne

    I think part of the problem is that people are still thinking of mobile computers, like the Nexus One, as “phones.” I wouldn't pay $500+ for a phone, but I spent $600+ on a Nokia N900 because I realized it was a mobile computer I was buying.

  • Adam Thierer

    That's a fair point, Blaise. I wonder though… what about the current experiments with true “mobile computers” (i.e. subsidized netbooks, tablets, the iPad,etc). Some are subsidized, others are not. How will those experiments play out in the long run? I certainly have no idea, but it will be interesting to see if there is a certain price point and specific device type where people are willing to make the plunge and pay full-freight up-front instead of making the choice to go with the subsidized “installment plan” model.

    It's an interesting economic and sociological experiment we're living through.

  • balleyne

    Yeah, good point.

    Another interesting part of that experiment, here in Canada, is a move away from subsidies with new wireless startups. WIND Mobile launched last December, Mobilicity and Public Mobile have launched this Spring. Haven't been paying as much attention to Public Mobile, but WIND and Mobilicity are both refusing to lock customers in with contracts… but that also means there's no subsidy on mobiles devices. To add to the challenge, the new startups are operating on different frequencies than the incumbents, so consumers can't bring over existing devices to the new networks.

    WIND and Mobilicity are offering much better, often unlimited plans, but it'll be interesting to see in the long run how many people are willing to pay $400+ for a Blackberry, even if that means getting much more bang for the monthly buck unlimited plans and better prices for service.

  • Jameson Penn

    Before making sweeping conclusions about the business model, let's consider for a moment that Google just blows at retail and customer service. Then once we control for that, perhaps people didn't want to pay full price up-front. I say this from personal experience.

    I just lived through buying a Nexus One and let me tell you it was hell, before you even discuss the (un)-subsidized price. From the time I called T-Mobile to investigate the purchase, to the UPS delivery to my door, it was…12 days. This was because Google doesn't let you contact them unless you placed an order. Have questions beforehand? forget about it. They miserably failed, so much so, T-Mobile came out looking pristine.

  • Michael Hampton

    I have a few ideas.

    First, even if a carrier offers unsubsidized handsets, it doesn't usually offer them with the same plans as with a subsidized handset – the available plans will be the same price with fewer minutes, or even more expensive, if you buy your handset outright. They certainly aren't cheaper, as one would quite naïvely expect when the carrier is no longer bearing the cost of subsidizing the phone.

    Second, as we all know from health care and other such debacles, the true costs of things tend to go up when they're hidden from the actual consumers. Seeing the “real” sticker price of handsets may help drive those costs down.

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