Did End of Phone Subsidies Produce Value for Users?

Many consumers might say they miss the days of two-year service contracts, accompanied by highly-discounted phones, plans abandoned by U.S. mobile service providers starting in 2013.

When phones were bundled with service, using a two-year contract, “customers could get a $800 phone for $200,” said George Ford, Phoenix Center chief economist. “You can’t do that, anymore.

Some might have heralded the end of bundled “phone plus service” contracts as a consumer win. Ford simply notes that consumers now pay full price for devices, and monthly costs for service have not come down. That suggests pretty clearly there was consumer benefit.

Service provider profits have increased to the extent they no longer are providing the phone subsidy. To the extent that consumers buy their devices on installment plans, they still are effectively locked into a device contract, even if they are not obligated to continue service with a specific carrier. “The policy solved nothing,” Ford notes.

That is an ironic outcome for policies designed to end tyranny and anti-competitive practices.

One can understand opposition to multi-year service contracts if there are no offsetting inducements, such as heavily discounting the purchase cost of a phone. But now people pay full price for service and full price for phones.

T-Mobile US attacked such contracts as inherently unfair to consumers, as they “locked in” customers to their service provider for the period of the contract. “No contracts. No Limits. No overages.” was the slogan at the time.  

Some objected to the ways such contracts obscured the cost of phones and lacked transparency. Some said the same about locked phones.

Such bundling of phone and service can lead to consumer overestimation of value, some have argued. But some studies argued that bundling phones with service provided consumer benefits, including lower phone purchase costs.

Anecdotally, if consumers no longer on subsidized device plans are paying the same for their service, and full price for phones, they have lost financial benefits.

To be sure, some will note that unlocked phones have some value. The freedom to end service with one carrier with about a month’s notice has some value. The ability to choose from most phones, not just the devices a service provider decides to carry, has some value.

But those advantages are harder to quantify than the savings consumers once reaped from subsidized phones.