T-Mobile Has Right Idea in Ending Phone Subsidies

T-Mobile Has Right Idea in Ending Phone Subsidies

Mobile phones have changed enormously over the past six years, but the mobile phone business model has not. You buy a magical device for practically nothing, then find yourself locked into a two-year contract with a baffling, shockingly expensive monthly bill. Not coincidentally, the companies that have led the smartphone revolution — Apple and Google — are consistently among the most admired in America while everybody hates Verizon and AT&T, the leading cellphone operators. The gadgets are great, the billing process is a nightmare.

Now T-Mobile, the longtime also-ran of the U.S. mobile phone market wants to shake things up by offering mobile service that's not a horrible scam. But will people be smart enough to figure out that they can get a genuinely better deal?

The key to understanding the mobile phone economy is that it features extremely high barriers to entry. Given the difficulty and cost of buying broadband spectrum and constructing a network, it is basically impossible to launch a new nationwide cellphone company. That means potentially staggering profits for incumbents.

On the other hand, the huge costs involved in upgrading a network to state-of-the-art infrastructure mean that fixed costs are much bigger than the marginal cost of serving an additional customer. So once you've built the network, you need to scramble like crazy to sign up as many people as possible. So far, operators have done that primarily with a bait-and-switch. Rather than tempt you in the door with low monthly bills, they induce you to switch by offering a discounted price for the latest and greatest phones, with the iPhone being the biggest prize of all. The customer walks out thrilled with the deal he got on his phone. Only later, when his ridiculous, complicated, and obscenely high bill comes, does he realize he has been fleeced.