Riding away with your phone subsidy.

T-Mobile USA has thrown down the gauntlet, announcing it intends to end the kind of phone subsidies that have allowed customers to pick up pricey smartphones like the iPhone for as low as $99, with a two-year contract.

Wireless subsidies have been part of the North American wireless experience for nearly two decades. In an effort to bring new customers on board, carriers wanted the upfront cost to consumers to be as low as possible. Until expensive smartphones arrived, consumers were assured they could get a new, cutting-edge phone at contract renewal time for very little money. Carriers tolerated the subsidy even for existing customers because the difference between the company’s cost and the amount consumers paid wasn’t large enough to negatively affect a carrier’s balance sheet.

Companies gradually earn back the subsidy over the course of a typical two year contract by artificially inflating prices for service plans and add-ons. Because wireless rates have been set with the assumption a customer has received a subsidized phone, it made sense to keep getting new equipment every two years, because customers pay for it on each monthly bill.

In most countries outside of North America, it works very differently. Most customers either pay for a phone outright or agree to finance its purchase through a wireless company, paying monthly installments for smartphones that often cost more than $600. Some companies offer more aggressive discounts if one agrees to a 1-3 year contract, but buyers still cover much of the cost themselves. In return, wireless companies abroad typically charge much lower rates for service and do not force people into lengthy contracts. Customers also find they can switch companies as easily as replacing a SIM card, activating an old phone on a new carrier’s network.

There are pros and cons to the subsidy model:

PROS

• Consumers get the latest phones at a reduced up-front cost up to every two-years;
• The subsidy win-back is collected gradually over the course of 24 months;
• Carriers aggressively compete on huge subsidies for popular phones;
• The reduced price of a subsidized phone brings reticent consumers into the market;
• Carriers have increased control over the equipment that is used on their network through price incentives;

CONS

• The subsidy model gives carriers an incentive to lock discounted phones to their network;
• Customers pay artificially higher prices for service, whether they take advantage of a subsidized phone offer or not;
• Consumers don’t realize the true cost of the phones and expect them to cost less than $200 regardless of their retail price;
• Customers are locked into lengthy contracts with stiff early termination fees to protect the subsidy win-back structure;
• Without a subsidy, equipment manufacturers would face natural market pressure to cut costs to remain affordable;

Legere

T-Mobile announced last week it was ending its phone subsidy program next year, and customers will be expected to bring their own phone, buy one at an unsubsidized rate, or finance a full price phone with the carrier. In return, customers will get a lower priced T-Mobile calling and data plan.

Some in the tech press are heralding the announcement as a consumer victory and a breakthrough for lower priced service plans. But before throwing the confetti, consider this.

T-Mobile is making customers bring or buy their own phones, but will still lock them into a two year contract with a $200 early termination fee.

T-Mobile’s retention of its contract plans might delineate the postpaid side of its business and its month-to-month, contract-free, prepaid business. But that does not mean much for customers.

John Legere, the new CEO of T-Mobile USA hinted the measure is designed to reduce customer churn — customers coming and going. Locking a customer in place with termination penalties assures shareholders customers are more likely to remain with T-Mobile for the life of their contract.

That represents a win for T-Mobile, but not for customers. Legere explained the benefits to investors:

“[We are going] to have a lower device subsidy obviously and overall value,” Legere told attendees at the Capital Markets Day Conference. “[… because of the] device margin — $200 to $250 — which we do not have to eat. Over a 24-month period [we get] a customer life value that is the difference between $550 on a Classic [traditional subsidy contract] plan and $600 on a Value [no-subsidy] plan.”

In other words, T-Mobile doesn’t have to front a device subsidy, still holds a customer with a two-year contract, and despite the lower-priced service plans, comes out $50 richer when the contract expires.  T-Mobile is essentially admitting it does not return the entire value of its former subsidy back to the customer.

What is more, T-Mobile may pave the way for other carriers to also drop handset subsidies, keep the traditional two-year contract, and only slightly lower prices.

Nothing peeves Wall Street more than the huge subsidy costs carriers pay up front to discount the latest smartphones. Getting rid of subsidies while only mildly adjusting prices could be the next hidden “price increase,” the perfect gift for an investor that demands higher revenue from every customer.

Fuhr

Joseph P. Fuhr Jr. is a real helper. An economics professor at Widener University and a researcher for the Coalition for the New Economy, Fuhr spent time pondering America’s current debt crisis and impending “fiscal cliff” and has come up with some ideas on how to solve it, starting with ending support for community-owned broadband networks. He shared his findings in a guest column printed the Tallahassee Democrat.

“Generally, [these networks] add to the debt load of the municipality that runs them, a burden that certainly has come true in Florida,” Fuhr warns.

Ask most people where the government spends too much and many will suggest corporate welfare, the military, Medicare/Medicaid, or outdated government programs that have outlived their usefulness. Professor Fuhr thinks the gristle that must go comes from about 100 “government-owned broadband networks,” which he labels as “GONs.”

Perhaps that acronym is partly wishful thinking, because Fuhr does not see much use for municipal or public utility broadband, even in areas still waiting for large phone and cable companies to provide the service.

“Of course, not all Floridians are fortunate, not all have access to high-speed broadband, and they should,” writes Fuhr, despite the fact commiserating with the broadband-less does nothing to extend the service to those still using dial-up connections. “However, this service is one that the private sector is able and willing to provide given the correct incentives.”

Incentives. Like taxpayer-funded tax breaks, grants, and rebates?

Fuhr has no problem advocating for taxpayer-funded incentives for private corporate broadband providers, but he opposes directly funding an independent, community-owned broadband service. But it really should not come as a surprise. Fuhr’s sudden interest in cutting public broadband to save us from falling off the fiscal cliff is not really by random chance.

Although readers of the Democrat will probably never learn the “Coalition for the New Economy” is actually a front group largely funded by AT&T, Time Warner Cable, and other telecom industry players that have to compete with community broadband providers, our readers now do.

Rep. Gerry Connolly (D-Va.) is fed up with Verizon Communications. The company handles most of the region’s 911 calls and has performed that task poorly in the last few years, argues Connolly.

“The whole purpose of 911 is that when you need it, it works,” Connolly told WUSA-News.

After several high profile 911 failures during significant storm events, Connolly and a few other congressmen are demanding Verizon resolve its 911 problems or face an intervention from the Federal Communications Commission.

The elected officials want Verizon to voluntarily comply, but if they won’t, all suggest it is time for the FCC to strengthen regulations and oversight to assure residents they will be met with a 911 operator when they call instead of a busy signal or nothing at all.

Verizon countered it takes its role in handling calls to 911 seriously, and when an issue arises, the company is quick to investigate, correct and apply any lessons learned across their system.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/WUSA Washington Gerry Connolly Va- Democratic Congressman critical of Verizon for its 911 performance 12-6-12.flv[/flv]

WUSA reports Connolly has grown tired of repeated failures with Washington, D.C.’s 911 system, handled by Verizon Communications. He wants the company to make changes to increase the service’s reliability, especially during storms when demand on the 911 system is greatest. (2 minutes)

Ford, Jr. (D-The Green Room)

Harold Ford, Jr., a former Democratic congressman from Tennessee and John Sununu, former governor of New Hampshire, are unhappy with an Op-Ed piece written by David Cay Johnston in the New York Times that calls out the telecom industry for high prices and and an uncompetitive marketplace.

Ford, who can usually be found in the green room of various cable news networks waiting to deliver his pro-industry messages on behalf of front groups like Broadband for America, says that 93 percent of Americans are happy as can be with their broadband Internet service.

Sununu joined Ford in some less-than-factual arguments about the state of American broadband:

Second, nearly 90 percent of all Americans can choose from two or more wireline competitors and at least three wireless broadband providers, most of whom now provide some of the fastest 4G LTE broadband networks in the world. Meanwhile, new fiber optic, satellite and wireless choices keep emerging.

Third, during the past four years, broadband providers invested $250 billion in the nation’s broadband infrastructure, while other industries sat on their cash.

Fourth, unlike many other consumer products, the monthly prices for broadband Internet have remained relatively constant, while average speeds have increased by 900 percent or more. Free-standing broadband service is now routinely available for $20 to $30 a month.

That is playing fast and loose with the truth. In reality:

• Most Americans have one cable and one phone company to choose from, not “two or more.” Wireless broadband providers offer service with a cap so low, it can almost never provide a suitable replacement for wired broadband service. Although AT&T and Verizon Wireless have growing 4G LTE networks, neither carrier has provided universal access to LTE speeds. T-Mobile and Sprint are only getting started. The fiber optic choices that are emerging these days are primarily from community-owned providers Ford’s industry friends vehemently oppose. AT&T does not offer fiber to the home service and Verizon effectively suspended expansion of its FiOS fiber network several years ago.  Wireless choices are now shrinking because of mergers and acquisitions and satellite broadband remains a painful experience regardless of the provider;
• Most that the investment made in “broadband” is focused on expanding wireless 4G service. That investment allowed both AT&T and Verizon to pay Uncle Sam dramatically lower tax bills — AT&T even collected a refund. Home broadband expansion has been far less expansive;
• Monthly broadband bills have not remained constant — they are rising, and more rapidly than ever. Speeds enjoyed by average customers have not increased by 900 percent, only some top speeds that are priced well out of range for most Americans. The price both quote for free-standing broadband is for “lite” service, often so slow it no longer even qualifies as “broadband.” Often, that budget service also comes with usage caps, sometimes as low as 5GB per month.

Sununu and Ford close:

Fortunately, very few policy makers in either party have endorsed the kind of heavy-handed regulations that Mr. Johnston’s arguments seem to imply — regulations that would only stifle investment and truly put America at risk of falling behind.

America has already fallen behind, and will remain in decline as long as regulators and Congress listen to a handful of telecommunications companies speaking from their sock puppet front groups and handing out campaign contributions to elected officials to keep things exactly as they are today.