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Summary:

The practice of locking phones is a symptom of a greater disease in the U.S.: device subsidies. If we can separate the hardware from the service, consumers will ultimately have greater choice and save money.

The issue of phone unlocking has become the cause célèbre of Washington lately. The White House has gotten behind a consumer petition to overturn the recent ban on  the practice. Not one, but three bills are wending their way through Congress that would make it legal for us to remove the network locks on our handsets once our contracts expire.

All of that legislation and bluster, however, isn’t going to solve the fundamental problem that produced the practice of locking devices in the first place: handset subsidies.

There’s a reason why carriers lock phones. They’re heavily discounting the cost of most devices, which is why you can get a $500 smartphone for $100 and many mid-range and low-end handsets for free. Carriers make their money back through monthly subscription fees that factor in those subsidy costs. For carriers to get the full value of the phone back, subscribers need to finish out their contracts, and locking devices to their networks functions as their insurance policy. It’s a hell of lot easier than repossessing phones.

Mortgage loan approved stampThe bottom line is most consumers don’t really own their phones. They’re mortgaging them. Just like you can’t sell your home without paying off your bank loan, carriers don’t want you selling your phone or taking it to another carrier without finishing your contract and paying off your handset loan.

Thus, we’re left with the locking mess, which leads to all of the problems pointed out by locking’s critics: Having to jump through hoops to get your carrier to unlock a phone when your contract is up, the inability to use another carrier’s SIM card when traveling overseas, and the difficulty of building a resale market for phones when the majority of devices are locked.

Why unlocking phones doesn’t solve the problem

Making it legal and easy to unlock phones might seem like an easy solution to this problem, but I guarantee you carriers will find some other way to protect their investments. Carriers could require deposits, implement some kind of collateral fee, institute more onerous contract restrictions, or they could simply raise prices. If carriers start losing money when customers skip out on the contracts, you can bet the customers that remain will have to make up the difference.

I’m not saying it’s right. I’m just saying that in this messed-up subsidy system, everyone is trying to protect their own interests. Consumers will try to unlock their phones, and carriers will try to stop them.

Many smartphonesIf we get rid of subsidies completely, though, all of those conflicting interests go away. Once you separate the service from the device, carriers have no interest — and no right — to lock devices. You may still be under contract, but since there is no subsidy recovery fee bound up in your monthly bill, carriers could care less what you do with your device.

Of course, paying full price for your phone is an expensive proposition. An unsubsidized iPhone 5 costs between $649 and $849, as opposed to the $200 to $400 most carriers charge with contract. But in the long run buying your phone up front will probably save you money. T-Mobile has been a trailblazer in this area, charging cheaper monthly rates for voice and data if you don’t opt for a phone subsidy. What’s more, once subsidies are gone, handset makers will be able to sell their wares directly to consumers, which could lead to a greater variety of devices and more price competition in the device market.

Ultimately, mobile voice and data rates are so high because our phones are so cheap — artificially cheap. If we reverse that equation, we wind up with cheaper subscriptions, more choice and phones we can do with as we please.

What can you do with an unlocked phone?

Unfortunately, having an unlocked device doesn’t leave you with too many options in the U.S. If you travel internationally with a GSM-capable phone you can plug in a local carrier’s SIM card and pay local rates. But in the U.S. itself there isn’t much mobility between carriers.

SIM cards galoreU.S. operators are split between GSM and CDMA camps, and while it is possible to activate a Verizon phone on Sprint’s network or bring an AT&T device to T-Mobile, there’s no guarantee that you’ll have to access every network or service they offer. U.S. carriers don’t just use different radio technologies, they use different spectrum bands. The band fragmentation problem got even worse with the introduction of LTE.

But there are signs that things will get better. T-Mobile is in the process of overhauling its network, aligning its 3G bands with those of AT&T. In 4G, we’re starting to see some LTE network convergence around the Advanced Wireless Services (AWS) band. We’re even seeing more dual-mode GSM-CDMA devices making their way into the market.

With emerging smart antenna and radio module technologies, handset makers will soon be able to pack a dozen bands into a single device. Eventually we might even see a universal phone in the U.S. that can work on any carrier’s networks, no matter what combination of technologies and frequencies they use. And if that point we’re no longer weighed down by subsidies, contracts or locked devices, consumers will be able to switch to any operator at their whim. That’s not a bad choice to have.

Mortgage image courtesy of Shutterstock user Stuart Miles; Smartphones image courtesy of Shutterstock user Reno Martin; SIM cards image courtesy of Flickr user mroach

  1. An interesting and plausible argument. I like T-Mobile’s approach to the issue.

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  2. the original iphone was locked and sold full price.

    just as big as the subsidy issue is the ‘carrier exclusive’ issue.

    what we need is carterfone rules extended to mobile and for the carriers to be completely out of the handset business. we should buy our phones and choose our carrier rate plans, this should be two separate purchases. we also need to outlaw mandatory data plans for smartphones. plenty of people are well served with using wifi as their only data connection and they should not be forced to buy an expensive carrier data plan because of the phone they choose to use.

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  3. Benjamin Metzler Saturday, March 16, 2013

    You are confusing the phone with the phone service. If I buy a subsidized phone from AT&T, I also agree to a period of time in which I pay for their service. If I decide to leave AT&T before that period has passed, I pay an early termination fee. At that point, my phone is still locked to AT&T (unless they give me the unlock code). So the phone lock and the service contract are independent. The only reason to lock a phone is to prevent a person from using another provider, not to prevent a person from breaking their service contract.

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    1. Kevin Fitchard Sunday, March 17, 2013

      Hi Benjamin,

      The two are linked. The reason carriers lock phones is to help them enforce those contracts and ETFs. The idea is even if you break your contract the carrier will eventually make its money back since whomever uses the phone will have to do so on its network. If you get rid of those contracts, or separate the subsidies from the contract then there is no longer a reason to lock the phone. You’re effectively, as you point out, separating the service from the phone.

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  4. Psst… the phones aren’t subsidized. Instead of paying $200 retail up front for your $60 mass-produced phone, you’re signing a 2-year contract where $10/mo goes toward your phone.

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    1. Kevin Fitchard Sunday, March 17, 2013

      Yep, that’s what I said in the post. I see your point that it may not be accurate to call that a true subsidy since the same person is paying the cost — it’s just shifted over to the contract. But that’s what the industry calls them.

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  5. “Carriers could require deposits, implement some kind of collateral fee, institute more onerous contract restrictions, or they could simply raise prices.”

    You mean like… ETFs assessed when you break contract, deposits mandated for folks with less than stellar credit, and using the information you provided to collections when you don’t pay up? Gee, I could never imagine anything like that happening!

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  6. Eliminating carrier locks and removing subsidies would put the big four (AT&T, T-Mobile, Verizon, and Sprint) on an unequal playing field. You may be getting the same “service” on Virgin Mobile as you would on Sprint, but Virgin Mobile doesn’t fix the towers, install new ones, or research technologies that improve service. The big four actually need all of the extra money they’re trying to squeeze out of us because of all the behind-the-scenes work they do.

    I don’t think there’s too much wrong with our current cellular phone market, but it would be better if ALL phones used sim cards so that the option to switch is eventually there when the contract is expired. It could potentially be a better business model for the big four though, if they worked only on infrastructure and left the billing and provisioning to MVNOs.

    I think the subsidy is actually a good thing because some people really want the latest and greatest device regardless of how much more they’re spending in the long run. They may not be doing themselves a favor but they are doing the rest of us a favor by funding improved technologies in cellular communication.

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  7. Kevin Fitchard Sunday, March 17, 2013

    Hi Martin,

    Actually the subsidy works against the model you describe. Carriers revenues won’t really change if they eliminate the subsidy, the collection timeline is just shifted. You could argue that subsidies actually work against innovation, since carriers have to take a massive margins hit when ever a hot new device comes out. When a new iPhone rolls out carriers have to pay three-quarters the cost of millions of new devices, money they could be using to upgrade their networks against the flood of traffic those new devices will produce.

    As for affordability, there’s always financing. It may sound like the same thing as the subsidy-contract model, but you’re separating the phone transaction from the contract. Once you eliminate the false pricing model in the market, handset makers have much more room to innovate and compete on price. The difference between a $350 Android device and a $650 iPhone really comes in to light.

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  8. Thanks so much for another post your stunning

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  9. I think you are confusing subsidies and phone locking (I suspect deliberately), so here are the a couple of equations to think it through:

    Subsidised phone + 2yr contract = locked during contract (2yrs), should be unlocked at end of contract automatically but is currently not.

    Unsubsidised phone + 0yr contract = locked during contract (0yrs), is unlocked at end of contract automatically (i.e. at the end of 0yrs)

    We see the problem now; it is Not that the phone is subsidised, it is that it is not unlocked automatically at the end of the contract.

    Yes, in the long it may (iPhones have great resale value) be cheaper to buy an unsubsidised phone, but people buy many things on financial schemes of the type; deposit and then monthly payments, there must thousands of such schemes i.e. it is common practice.

    Given this and what seems to me deliberate confusion of subsidy and lack of automatic unlocking at end of contract, I question your motives; you don’t tackle the chief injustice. Why did you write this piece?

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    1. Kevin Fitchard Monday, March 18, 2013

      Fairhead, I’m not confusing the two things. I’m saying they’re directly linked. Carrier’s lock devices to protect their contract revenue. If you delink the service from the phone from the service, you create separate markets for them. If you create a separate independent market for phones then there is no need to lock phones.

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  10. “Unfortunately, having an unlocked device doesn’t leave you with too many options in the U.S.”

    I disagree. Here are some of the options an unlocked phone gives you.

    1. You can sell it much easier, especially if it is a GSM phone.
    2. You can bring it to a MVNO. Most MVNOs now have BYOD. My guess is all will have the
    option eventually and pay much less for cell service.
    3. You can hand it down to a child. My son received my unlocked iphone4, now running on
    a $30 T-Mo plan.
    4. You can use it as a plaything, this is mainly for tech geeks. Android for Ubuntu, or
    jailbreak your iphone.

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