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Summary:

Carriers subsidize handsets when they’re sure that their customers are locked into their contracts. Remove that certainty, and it becomes much less risky to break out the true cost of the handset and have the customer pay it off separately.

Man with two mobile phones smartphones
photo: Shutterstock / Stanislav Komogorov

Britain’s telecommunications regulator, Ofcom, has told the country’s fixed-line and mobile carriers that they will no longer be allowed to keep customers tied to their monthly contracts if they raise prices before the contract is up.

That means any price hike, no matter how small, or even the lowering of a voice or data allowance mid-contract. The move follows a consultation earlier this year and it has massive implications for handset subsidies.

The end of the hidden “subsidy”?

At the moment, contract customers in the UK buy a phone and pay a monthly rate that mixes up two elements, namely the monthly service fee and the paying-off of the handset. This system can function because customers are locked into their monthly contracts, giving carriers an incentive to subsidize the devices to a degree.

The carriers had warned Ofcom that they were likely to stop subsidizing handsets if they were forced to allow customers to exit the contract without penalty, in the case of a price rise. That’s precisely what Ofcom has decided to do, so we can expect those mixed-in subsidies to disappear pretty soon. And yes, that potentially means prices will go up a bit.

Indeed, O2 has already moved to decouple the cost of the handset from its service contracts, similarly to how carriers operate in Germany (and to what T-Mobile recently decided to do in the U.S.).

The trade-off

For the customer, this has an added advantage on top of the ability to walk away in the case of price hikes: at the end of a two-year contract, it is much easier to continue with the service fee only.

In a sense, the real change here is psychological – consumers are no longer under the illusion that they’re getting a handset “for free” when they initiate a contract. But at the same time, they’re not locked in when their carrier decides to bump its pricing – and history shows the carriers really do like to do that, regularly.

So even though carriers may charge more up-front for their phones, once the new rules come into effect in 3 months’ time, consumers are less likely to be hit by mid-term price hikes. It’s a trade-off that at least makes costs more predictable.

Now we just need to see what the operators will do in reaction to Ofcom’s move.

  1. The solution could be to go the way that Israel’s established carriers have gone.

    They charge a fortune (about 30% premiums) for unlocked mobile phones at retail. The carriers then let you pay off the over priced phones over three years. The monthly payments are now pretty cheap. Any month that you spend a certain amount on coverage (say, over $50), they gift the monthly payment to you. If you choose to leave for another carrier, the phone is yours, you just have to pay back the remainder of the amount owed.

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  2. Or, here’s a thought, they could just price plans for the two year contract so that they don’t raise them half-way through.

    It’s not like plan prices are subject to dramatic changes due to some underlying commodity price. The carriers raise prices because they can get away with it after locking people in.

    They are not going to face some disastrous situation if they can’t hike prices every few months, and by repeating the line that this will force carriers into abandoning the current subsidy system is just buying straight into the PR carriers were doing to stop Ofcom adding reasonable consumer protection.

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  3. what is the real cost if you take out all these subsidies, must be cheap, we just have never had anyone in the industry tell the truth, the day they invented call back, they created an industry out of nothing, they know us too well as they say.
    when tesco get sorted, they’ll sort them all out i imagine

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  4. The biggest three costs for every contract to be delivered are:
    1. The upfront price they pay for the handset- this is known and paid at the start
    2. The cost of the commission for the sale- this is known and paid at the start
    3. The infrastructure cost of the network- guess what- also known at the start.
    There is very little excuse for operators to EVER increase price in mid contract.
    I suspect this is a scare story put about by operators trying to get the new measure dropped.

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  5. We would be much better off if we could get more transparency in cell phone costs by eliminating subsidies. It’s outrageous in the US that if you keep your phone one day more after the two year contract expires you are paying the carrier money per month for absolutely nothing.

    It would also be interesting if the US ever got rid of the toxic subsidy system how that would effect phone market share. Would phones like the Nokia Lumia 520 which is $99 off contract have a higher market share than a $649 iPhone or would people still be willing to pay for the higher quality phone if they were aware just how much more they are paying for it.

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