ThoughtPiece: Those Nasty Cell Phone Contracts

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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?

  • Wibbly

    In the UK, at least, contracts subsidise the cost of the phone. That’s how users appear to be able to get them ‘free’. The service provider recovers the cost over the earlier life of the contract. Locking in the customer also allows them to take a ‘whole contract term’ view of the money they think they’ll get from the contract and do crazy offers like ’1/2 price for the first 6 months’, etc.

    There’s a LOT of churn in the mobile industry – people who change their provider at the end of their contracts. Providers don;t get it all their own way :-)

  • Wibbly

    In the UK, at least, contracts subsidise the cost of the phone. That’s how users appear to be able to get them ‘free’. The service provider recovers the cost over the earlier life of the contract. Locking in the customer also allows them to take a ‘whole contract term’ view of the money they think they’ll get from the contract and do crazy offers like ’1/2 price for the first 6 months’, etc.

    There’s a LOT of churn in the mobile industry – people who change their provider at the end of their contracts. Providers don;t get it all their own way :-)

  • Aaron

    In Canada,

    When you acquire a cable / dsl modem, the modem -is- locked to a single provider.

    When you acquire a cable / satellite box, the box -is- locked to a single provider.

    I’m in a contract with the GSM provider here in Canada. I’ve even had it expire and I renewed it twice. I know I’m not going to switch to another provider, because I’m content with the service, despite the average price of a mobile bill in Canada being the highest in the world.

    I guess I’m just someone who is easily satisfied.

  • Aaron

    In Canada,

    When you acquire a cable / dsl modem, the modem -is- locked to a single provider.

    When you acquire a cable / satellite box, the box -is- locked to a single provider.

    I’m in a contract with the GSM provider here in Canada. I’ve even had it expire and I renewed it twice. I know I’m not going to switch to another provider, because I’m content with the service, despite the average price of a mobile bill in Canada being the highest in the world.

    I guess I’m just someone who is easily satisfied.

  • Jim

    Cincinnati Bell Wireless (Cincinnati, OH) dominates their market with a no contract program. Additionally, they have confounded the likes of Cricket by meeting them head-on with a Cricket-like offering. And no, I am not a CBW employee or shareholder, just an admirer of a smaller, scrappier company doing battle and clobbering the nationals. Every town would benefit by having a CBW.

  • Jim

    Cincinnati Bell Wireless (Cincinnati, OH) dominates their market with a no contract program. Additionally, they have confounded the likes of Cricket by meeting them head-on with a Cricket-like offering. And no, I am not a CBW employee or shareholder, just an admirer of a smaller, scrappier company doing battle and clobbering the nationals. Every town would benefit by having a CBW.