Independence Day from subsidies and agreements

Jul 5, 2010
4

Yesterday, of course, was Independence Day in the US, and today our American readers are likely recovering from yam overdoses. It seemed the ideal time for a geeks' Independence Day, trying to divorce American cellphone buyers from their heavily subsidised plans and, instead, push them toward cheaper-in-the-long-term unlocked devices. Problem is, none of the US carriers want to play ball.

A little context first: mobile phones, even pretty uninspiring ones, are expensive. Certainly more expensive than the handful of dollars you see on price tags in stores. That's because carriers like AT&T, T-Mobile, Verizon and Sprint subsidise them; in return for your commitment to a two-year agreement, the network chops a fair chunk of the real cost of the handset off, and generously gives you the phone well under true market value.

Of course, it's not actually generosity that's motivating them, and you can be sure they make their money back in the long run. The reality is that the whole system is a little like a hire-purchase agreement, with the customer spreading the cost of the phone over the course of their two year contract. That's why, if you want to break your agreement mid-way through, there are early termination fees (ETFs) to be paid: the carrier budgeted the price they sold the phone to you based on you sticking around for the full two years. It's also why, if you lose or break your phone and don't have insurance, you'll be paying a whole lot more second time around, even if it's exactly the same device: the carrier already has you hooked, so there's no need for them to sweeten the deal.

Interestingly, while in North America it's unusual to find a free cellphone on a new contract - unless it's a particularly low-end device or a particularly expensive plan - in Europe the opposite is true. Ask most Europeans to pay the equivalent of $100 to $300 for their new phone - on top of commitment to a contract - and you'll probably get laughed at. "Free" phones have become the norm across Europe, though of course they're not really free: again, the carrier makes the subsidy back by building the charge into the monthly fees.

In Europe, though, unlocked devices have been gathering pace. Most people are familiar with the concept in relation to the iPhone, one of the more headline-grabbing "locked" phones of recent years. In the US - and, up until the iPhone 4, in Europe as well - the iPhone is locked to a single carrier; if you want to take out the AT&T SIM (the "Subscriber Information Module" which stores all your details so that the network knows whose phone is whose) and put in one from another carrier, you need to unlock the iPhone first. The unlocked handset business is considerable outside of the US, and the carriers have moved to accommodate it: SIM-only plans, which cost less each month (since you're only paying for service, not the subsidised price of a phone) but generally include lashings of free minutes, messaging and data are on offer from most networks.

If you're willing to stomach a healthy upfront cost, then you can make some considerable savings. For instance, taking UK carrier O2 and the HTC Desire as our example, if you want the phone free on a new contract then they'll charge you £40 ($61) per month (on a two-year agreement with 900 minutes and unlimited messages), working out to £960 ($1,452). Head over to a retailer like Clove, for instance, and the SIM-free and unlocked Desire is £388 ($587) including VAT; O2's 12-month "Simplicity" plan, with the same minutes/messages, is £20 ($30) per month. Over the course of the year's contract you'll pay £628 ($950) or, over two years, £868 ($1,313). However, it's worth remembering that O2's "Simplicity" plans kick off at just £10 ($15) per month, so if you're a basic user it's far more affordable.

So, our plan was to take the fight to the US carriers and make a stand for unlocked devices and SIM-only plans. Unfortunately, the networks don't make that easy; look at the plans they offer online, and you'd be excused for thinking there were no contract-free options. Happily, if you call them up they're a little more forthcoming. We spoke to AT&T and T-Mobile USA to find out what SIM-only options were on the table.

In fact, both carriers offer no-contract plans. AT&T have three which they call "Zero Contract", starting at $39.99 for 450 minutes, $59.99 for 900 minutes or $69.99 for unlimited minutes. Data is charged at the usual $15 per month for 250MB or $25 for 2GB, while SMS plans range from $5 through to $20 for unlimited messages. T-Mobile USA, meanwhile, ask $39.99 for 500 minutes , $49.99 for 1000 minutes or $59.99 for unlimited minutes, then ask $10 per month for unlimited web and $10 for unlimited SMS. Neither have a minimum agreement length, but T-Mobile do charge $9.99 for the SIM itself and insist on you paying for your service a month in advance.

So far so good, but if you take a look at the regular plans the two carriers offer, you'll see that the prices are basically the same. That means, bar being able to drop out of the agreement earlier, there's far less of a financial incentive to buy your device upfront and then pair it with service. Could that change as the subscriber landscape continues to evolve and carriers look to steal customers from their rivals? Perhaps, though it'll take a significant rethink in how consumers shop for their service and how long they're willing to sign their cellular lives away for. For all their complaints, the US carriers have the better end of the deal at the moment; hopefully a more price-conscious, market aware public will help push things in the opposite direction.


Must Read Bits & Bytes