T-Mobile Executive Calls For End to Cell Phone Subsidies

T-Mobile's Chief Marketing Officer Cole Brodman has an interesting idea for revamping the mobile industry -- and it involves killing the subsidy plans that have driven smartphone adoption over the past five years. Brodman was participating in a round-table at the Geekwire tech summit; other speakers included Jon Irwin, the president of Rhapsody), Mike McSherry, CEO of Swype, and David Bluhm, CEO of Z2Live.

Asked what one thing he'd change if he had the power to do so, Brodman pointed to subsidy programs. “It [device subsidies] actually distorts what devices actually cost and it causes OEMs, carriers — everybody to compete on different playing fields," the CMO said. "I think it is really difficult, especially from a consumer perspective, because it causes consumers to devalue completely the hardware they are using…. It is amazing hardware, but it has become kind of throw away. So, it is unfortunate, you’ve got dual-core, multiprocessor devices with amazing HD screens that get thrown away at 18 months.”

That's an interesting position for a marketing executive to take, but Brodman's comments on the irregular playing field and hidden device costs got us curious about what the differences are between subsidized and unsubsidized pricing. Here's AT&T's pricing on the iPhone 4S, the recently released Galaxy Note, and HTC's Titan. The A777 is an older feature phone, the HTC Titan is powered by Windows Phone 7 and was released in Q3 2011, and the iPhone 4S needs no introduction.  Here's what we found:

Brodman isn't kidding about an irregular playing field. The HTC Titan is the most subsidized device on our list -- Microsoft is obviously desperate to gain market share in mobile -- but both the iPhone 4S and the Galaxy Note carry $400+ discounts. The cheapest smartphone AT&T offers without a subsidy is the thoroughly mediocre HTC Status, for $349. To add insult to injury, it's only available in mauve.

The face of despair

The question is, is AT&T's unsubsidized price model a fair example of what phones should actually cost?  It depends on how you define a smartphone. Hop over to NewEgg, and you'll find "smartphones" much cheaper;  the Galaxy Y is just $166, while the A777 is $59.99. The Galaxy Y, however, is only a smartphone by the kindest definition of the term. It's built around a single-core ARM11-class processor that's weaker than the Cortex-A8, offers 290MB of RAM, and 158MB of internal storage (a microSD card can boost this up to 32GB). Performance-wise, it'd be somewhere between an iPhone 3G and 3GS, but with a weaker GPU and slower storage.

The Samsung Galaxy Note, on the other hand, is $699 at NewEgg -- $50 more than even AT&T's unsubsidized price. Between the two sources, we've got at least a rough feel for what an unsubsidized phone model would look like -- and it's not a pretty picture.

The Pros and Cons

Huge subsidies are what allow manufacturers to push the envelope and continue offering better and better specs at breakneck speeds. Carriers are willing to pay them because, from T-Mobile or AT&T's point of view, they're going to make $360 off just your data plan ($20 minimum at 18 months). Messaging Unlimited (a virtual requirement on all AT&T plans) is another $20, while the minimum plan for non-seniors is $39.95. Total amount paid to Ma Bell works out to $1439, before taxes, fees, and overages.

From AT&T's perspective, giving you an iPhone 4S for $199 is a great deal.

The downside to the current model, of course, is that carriers and manufacturers have zero reason to invest in software upgrades or feature improvements. The Ice Cream Sandwich rollouts are proof that companies invest in such updates as little as they can get away with. The entire focus of the cycle is on the next set of customers who have upgrades to spend -- once you've updated and signed your new contract, you're locked in and irrelevant.

A more realistic price model would upend this structure and force manufacturers to invest in phone updates. Consumers who paid $600 for a phone aren't going to be so willing to toss it away, and as Brodman says, they'd be more irritated if software updates weren't delivered in a timely fashion. The reason that's not going to happen is simple -- any attempt to move away from subsidies would force customers to pay drastically more for lower-quality devices. Compare Samsung's Galaxy Y at $169 against the iPhone 4S at $199 and the gap is pathetic.

It's an interesting idea, but practically unworkable as far as the mass market is concerned. AT&T and its ilk have built a market structure in which consumers gladly accept a new bauble every 18 months in exchange for paying for text messaging (which literally costs carriers nothing) and overage charges in which 300MB of data for $20 is a fair market value.