Greed. Why Mobile Carriers’ Lust for Profits Doesn’t Work for Consumers

I’m convinced the mobile carriers don’t have a clue. What’s irking me now is the report that Verizon is creating its own cross-platform app store for Verizon branded mobile phones. On the face of it, it sounds great. Verizon wants to make it easier for its customers to find applications to make their phones more useful. That would be grand if that was the true motive. Naturally, as with many things VZW (e.g., crippling Bluetooth so you can’t share pictures, pressuring manufacturers not to put WiFi on its smartphones, etc.), the goal is not so altruistic from a consumer perspective. The powers that be at Verizon likely sat shaking their heads at AT&T being cut out of the action on the iPhone app store. How much money would AT&T have made if they’d had the app store instead of Apple – or so the thinking went inside Verizon. Here’s the thing, though… Where is the logic behind AT&T or Verizon or any carrier mandating that your phone only support their app store? How does managing an app store fit into this infrastructure company’s core competency? It doesn’t. It can only end up being a Byzantine mess which will prove confounding to developers and consumers alike.

But, this brings me to another thing that bothers me about mobile carriers. Why are they in the phone selling business at all? Think about that iPhone for which you just paid $199. The PR spin is that the phone is so expensive that AT&T has to subsidize it. As a result, they have to lock you into a contract so they can recoup the losses they made subsidizing your phone. That may or may not be the total truth, however. What is never said is that the iPhone 3GS is estimated to cost Apple ~$179 to build. The unsubsidized price at AT&T is $599 (Apple sells it to AT&T, reportedly, for $399). That’s quite a hefty profit margin. Such margins are likely to make computer manufacturers and retailers very jealous since their margins are in the 10-20% range, if they’re lucky. The reality is the phone margins are artificially high. Manufacturers charge carriers more for phones than they would in a truly free market system because they know (and the carriers know) the carriers will make their money back on monthly fees for phone plans, text messaging and unlimited data. This is my own estimate but assuming even an optimistic 30% margin, the iPhone would likely go for around $235 if you could pick it up at your local electronics store and not have to worry about the carriers’ funny math.

To my mind, such cell phone antics both inhibits innovation and artificially stifles demand. Regardless of the phone I get, the two year contract makes it likely I won’t consider upgrading to another phone as long as I’m under contract. After all, why would I want to pay the unsubsidized (artificially high) price for a phone even if my current one is outdated and no longer suits my needs. I may want the brand new handy dandy phone, at the unsubsidized price of $600 it just wouldn’t make sense – not if I can wait a year until my contract is up and pay $200. Demand is squashed. If demand was higher, the mobile innovation curve would undoubtedly change for the better.

As far as I’m concerned, like your telephone provider, mobile carriers should only provide the connectivity on which the phones work. They should leave the devices and app stores to be managed by the free market which would put customers’ needs first. Carriers would protest that people expect them to assume responsibility for supporting their phones. Well, we expected AT&T to handle our phones when it was a monopoly, too. We got over it post-monopoly and became pretty used to buying phones and upgrading when the mood hit us. Let’s hope it doesn’t take government regulation to get the carriers to start acting in the best interests of consumers…

Disclaimer: I have service from both AT&T and Verizon and am generally satisfied with both – though I sometimes disagree with their business methods.