For most consumers, one of the most significant downsides of the mobile phone business is being locked into contracts with a carrier. The rationale we are given by the cellular companies is that they need such contracts to justify their high customer acquisition costs. They tell us that this also enables them to subsidize lower prices on the equipment and thus make mobile phones affordable to a far larger population. Yet does it really have to be that way?
The short answer I have is this: I don’t know. I haven’t seen any in-depth studies of the economics of the cell phone industry, and so I’m hesitant to pass too strong of a judgment.
However, here is what I do know.
When I buy a new TV, I am not locked into a particular cable operator. When I buy a new PC I am not locked into any one ISP. I have never bought a landline phone that required me to sign a contract with a particular local telephone company.
Contract lock-in serves to limit consumer choice and thus limits competition in the market. Is it any wonder why consumers complain about poor customer service and hard to understand pricing plans and bills? There’s much less incentive for the service provider to change when they know their customers are locked in to 2 year contracts. I am sure that many thoughtful readers out there work in an industry where you can lose your customers on the turn of a dime if you don’t treat them right. That makes quite a difference, doesn’t it?
Even the equipment manufacturers don’t like the contracts, for it lowers the value of their brand in the minds of customers. Think about a vendor like Nokia or Motorola and some of their phones being given away for free. Talk about cheapening of the brand. Is it any wonder why Apple is so determined to prevent similar price subsidies to its iPhone?
Not too many years ago, consumers were told that they couldn’t keep their phone number if they switched carriers. Now we have local number portability, and one less barrier to consumers being able to exercise freedom of choice without a punitive cost. I don’t know if we’ll ever get rid of those pesky cell phone contracts, but it is fun to dream about it, isn’t it?
