Finally! Competition threatens unfair cell phone pricing models
Cell phone bills are now the second-highest monthly cost for some American families, trailing only mortgage or rent. That means it’s worth the effort to poke and prod on a regular basis looking for a cheaper option. You can probably find one. Change is afoot in the industry.
With family plans and megabyte-hungry smartphones and tablets, wireless costs have skyrocketed in the past three years. Half of consumers now spend more than $1,200 annually on their cell phone bills, according to a survey by Harris Interactive. But there is a surprising bit of good news.
The past several months have seen disruption in cell phone pricing models that together represent the most dramatic change to wireless pricing since the introduction of the iPhone. While there's confusion, there is also opportunity. We'll discuss these changes first, then make specific recommendations that can take a big bite out of your bills.
T-Mobile, the also-ran of the big four carriers, is behind most of the disruption. Let's hear it for competition! (Thanks, Justice Department, for blocking the T-Mobile, AT&T merger).
Break #1 -- The end of early termination fees. Well, sort of. All the major carriers now offer plans that let you finance new phones through monthly payments, rather than giving you the gadget up front but extracting a pound of flesh if you break your contract. This isn't strictly speaking a cost break for consumers, but it is a risk-mitigator (no more surprise $350 fees!) and it's a heck of a lot more honest way to charge for cell phones. If you leave your carrier, you have to finish paying the price of the phone, whatever that is. That’s fair.
Break #2 -- Quicker upgrades. Break #2 is tightly connected to Break #1. In July, T-Mobile introduced JUMP -- "Just Upgrade My Phone." Consumers who finance their phones can turn them in early and get a new one every six months. Sounds like a great deal! And it is, with a few catches. The big one: you don't get to keep your old phone. You trade it in, meaning you lose whatever you've invested in it. T-Mobile has done the clever calculation to realize used smartphones have resale value that most consumers don't or can't monetize. The big plus: financing the phone this way also acts as phone insurance. Your two annual upgrades can be used to replace a broken or stolen phone. Here, too, there is a catch: consumers must pay a hefty deductible, as they do now for insurance.
All the other carriers have since mimicked T-Mobile's clever JUMP program. Their popularity among consumers remains to be seen, but Verizon, Sprint, and AT&T were clearly afraid they'd cede the gadget-conscious crowd if they didn’t act fast.
Break #3 – Truly global service. Anyone who's used a passport in the past five years knows the pain of international cell phone charges. Again, T-Mobile has thrown that market into chaos by announcing recently it was ending international roaming charges. Users can call, text and download at normal prices -- but at reduced speeds. Higher speeds can be purchased, however. So far, we are waiting for other carriers to respond.
While none of these breaks may apply to you, the disruption in pricing models will eventually impact you, particularly in the crucial area of data charges. Can T-Mobile ride a wave of consumer-friendly pricing to relevance? It's too early to say, but the No. 4 carrier is gaining customers for the first time in years. If the gains continue, fundamental change may hit the cell phone industry, and that would be a welcome upgrade.
Wireless pricing has always been fundamentally unfair, designed to force everyone to overpay. Generally, consumers are required to buy service they don't need as insurance against a costly extreme event. First, it was minutes -- buy 1,000 minutes every month, even though you use only 500, because one month you might have a crisis and use 2,000 minutes and be hit with a $150 bill. Today, it's data -- pay Verizon the extra $10 monthly for two more gigs of downloads, because excess gigs after the fact cost $15 each. Data costs the wireless firms the same whether you pay for it this month or next, so why should Verizon be able to triple the price based on time?
That's Gotcha Capitalism. It's also a protection racket.
Once upon a time, it could be claimed that wireless firms needed the predictability that came from requiring consumers to declare upfront how much network they needed. That's silly today. It's also competition is a welcome addition to the marketplace.