I’ll bet that most of you thoughtful readers out there like discounts, and like free stuff even better. So it’s no surprise that one aspect of the cell phone market that most people like is the carrier practice of offering phone discounts or subsidies. Indeed, many phones are offered to the public at the magic price of “free.†Of course, in order to receive those subsidies, a consumer must agree to a service contract with the carrier.
Yet aside from the negatives of being locked into the contract, do these price discounts really save the consumer any money? Let’s look into this more deeply.
One of the fundamental rules of economics is summed up in the old saying that “there’s no such thing as a free lunch.†Every economic good or service has a cost; the only real question is who bears that cost. In the case of these cell phone discounts, who do you think really absorbs the cost of those subsidies? Hint: the carriers are not in it to offer you a phone discount as a charitable contribution. They do not eat the cost of that discount; rather, they pass it along to you, the consumer, in the form of higher monthly service fees.
Columbia Law Professor Tim Wu explains that in effect, they can sell telephones on a “buy-now-pay-later†basis, like an installment plan, as opposed to a lump sum purchase. There are some problems with that.
Consumers pay those higher monthly fees regardless of whether they take advantage of the price subsidy. So those of you who buy unlocked phones or phones at full retail end up paying for a discount you do not use. In reality, consumers should have the option of paying lower service charges if they do not take advantage of the price subsidy.
The same goes for those consumers who choose to keep their phones for a period of time longer than their contract. They should have their rates lowered after they have paid off their equipment.
But for me the greatest objection is this: we have no idea how much the carriers jack up their rates to justify the cost of this subsidy. As mentioned above, the system is really a form of installment purchasing, which is really a form of financing or a loan. With every other type of loan, there are numerous regulations mandating transparency as to the real cost of that loan to the consumer. With the cell phone industry there is no such disclosure.
Does anyone think for a moment that if you sign a two year contract, that it takes the full two years to pay off the price subsidy? I am willing to bet that if we knew the extra amount of money we pay on each monthly bill to cover the equipment subsidy and calculated the effective rate of interest, that we would be shocked. However, we can’t know that because the carriers don’t allow us to know.
The bottom line is this: In the cell phone business you as a consumer are forced to pay an installment loan on all or a portion of the price of that phone, with no disclosure as to what interest rate you are effectively being charged. There is no way to opt out of paying for this loan as long as you want cellular service, even if you bring your own equipment. So the next time you see that contract price discount on a cell phone you want, just remember that you are being asked to pay a premium for the illusion of a discount.
