Wireless Accounting Fiction

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.

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