There is a debate about ad blocking on the Internet every so often, and the release of iOS 9 with its support for content blockers has reignited it.
I am sympathetic to both sides. I don't block ads, but I do block both Flash and ad trackers. I block Flash because it slows down browsers, and I block the tracking because I don't think it's appropriate for any single entity to know by default what I do when interacting with completely separate entities. It's fine for Google to know what I do on YouTube since it owns YouTube. It's not fine for it to know what I do with every site I visit that runs Google Analytics.
That said, I also make a small amount of money from writing on the Internet, and that money ultimately comes from advertisers. I don't get paid anything close to a living wage for how much time I spend on it, but I'm blessed to be in a position where that doesn't have to matter if I don't want it to. Many people are not.
Right now, proponents of ad blocking list all the abuses of online ad technologies and say, "adapt or die". They might also point to focused (and non-abusive) ad networks like the Deck or point out that advertisers barely know anything about the effectiveness of their spots on TV or spreads in magazines. Those media can't track ad targets like online advertising can, and it was fine. Maybe just take that attitude online.
Those arguments are fine for a certain set of people who have audiences that skew affluent, but it's bad for everyone else in the short to medium term. If you tell advertisers that they will have less targeting, they'll pay lower rates. They already pay next to nothing, so it'd be a financial bloodbath.
It's tough for publishers. The hard fact of the matter is that the supply of content creators far outstrips demand. Internet technology makes publishing content of all kinds easier than it's ever been. A laptop is far cheaper than a printing press. A webcam is far cheaper than a TV studio. The upshot of that fact is that more people want to make a living by writing or making videos or whatever on the Internet than the market can possibly support. Take away the easy avenue of super intrusive ads and some publishers will go away because every other option is really hard.
I know this. I've been writing consistently, year-round on the Internet since mid-2007. By now, I think I've gotten pretty good at it, but "pretty good" isn't good enough to justify me doing it full time. The market has spoken by now. It says I'm not special enough to warrant a full-time gig. I am far from alone.
This is where it gets tough on the publishing side. A lot of new people appear on the Internet every year trying to make it by creating content. Sturgeon's Law says that most of them won't.
But everyone produces a lot of crap when they first start. Everyone who writes a lot says they look back on their early work and cringe because it's so awful compared to where they are in the present. A ruthless world where only the largest publications make it and it's mostly impossible to make any money without being a part of one of them means that only the people who can afford to write a lot for no money to prove themselves to those publications will make it. Only people who are decently well off will be able to break into the business, and that's not an appealing future. I realize it's kind of like that now in a lot of ways, but it has room to get worse.
I don't know what the answer is. Maybe it's micropayments, although I'm not bullish on them. Maybe it's some kind of scheme to essentially pay people to read sites and look at ads, although I'm not bullish on that either. If I did know, I'd be going and doing that instead of writing this essay. The long term good news for Internet content creators is that the future will have no TV or radio or magazines and only data flowing on the Internet. The ad dollars that go to old media now will go to online media in the future because they'll have to. That'll mean more ad money to go around. Its just that no one knows when that future will arrive, and many creators won't survive financially until then.
I hope there is something between the near privacy-less Internet we have today and the dystopian future without journalism. If it's out there to be found, iOS 9 and content blockers are giving the people searching for it a new sense of urgency.
Showing posts with label analysis. Show all posts
Showing posts with label analysis. Show all posts
Friday, September 18, 2015
Friday, June 15, 2012
Two Charts That Illustrate Why Unemployment Is So High Still
The answer to why the employment part of the recovery has been so slow is a very simple one. I'll use two charts to show why: private sector employment and public sector employment. The data is seasonally adjusted and comes from FRED, and the public sector figures have temporary census workers removed (because they're just that: temporary) thanks to data published by Veronique de Rugy of George Mason University.
First up, the private sector:
Click the image to make it bigger. The X-axis is months after the official end of the recession.
Compared to the last two recessions, the rate of job growth from the official end of the recession (June 2009) is actually doing OK. The public sector is by no means "fine", as it lost nearly 8.9 million jobs from its peak of employment (January '08) to its trough (February '10) and it's still about 4.5 million jobs below that peak. That deficit in jobs doesn't even account for the number of jobs needed to keep up with population growth either.
However, its growth is similar to that after the 1990-91 recession, and it's doing better than after the 2001 recession. It would be great if it was growing jobs at a higher rate, but its current rate is not out of the ordinary for a post-recession economy.
Now, the public sector:
There's your problem. Overall public employment has done just about nothing but fall since the end of this recession. The terrible recent jobs numbers can mostly be blamed on the decline of the number of government workers. It's less a federal problem than a state and local problem, but that's your explanation for why unemployment isn't lower.
First up, the private sector:
Click the image to make it bigger. The X-axis is months after the official end of the recession.
Compared to the last two recessions, the rate of job growth from the official end of the recession (June 2009) is actually doing OK. The public sector is by no means "fine", as it lost nearly 8.9 million jobs from its peak of employment (January '08) to its trough (February '10) and it's still about 4.5 million jobs below that peak. That deficit in jobs doesn't even account for the number of jobs needed to keep up with population growth either.
However, its growth is similar to that after the 1990-91 recession, and it's doing better than after the 2001 recession. It would be great if it was growing jobs at a higher rate, but its current rate is not out of the ordinary for a post-recession economy.
Now, the public sector:
There's your problem. Overall public employment has done just about nothing but fall since the end of this recession. The terrible recent jobs numbers can mostly be blamed on the decline of the number of government workers. It's less a federal problem than a state and local problem, but that's your explanation for why unemployment isn't lower.
Wednesday, February 22, 2012
Apple Being Singled Out Over Foxconn Isn't Fair, but That's Fine
The Nightline special on Foxconn and Apple was an interesting look inside the world of electronics manufacturing in China. It's interesting to me to see how the issue has exploded of late, as it seems to come and go as various issues crop up. I'm not sure what the catalyst was this time, but here we all are looking at it.
It's a weird thing for most Americans, I expect. Despite the very real issues with things like too much overtime and underage workers, most reports say that Foxconn's factories really are among the best in China. I've likened factories with dormitories to the phenomenon of company towns in America. It's not a perfect analogy, but having company towns is a phase that this country went through during its industrial development. They weren't great for workers, but they're better than subsistence farming. The same goes for Foxconn in China.
It's not that dissimilar from the sweatshop scandals that plagued Nike in the '90s. The Nightline piece had someone bring that up, though the reference was about a different point. A number of economists have argued that sweatshops are a good thing in comparison to subsistence farming, which does make them a net positive. That's certainly not to say that industrial development should get to the sweatshop stage and stop. The existence of sweatshops and cramped factories could overall be a good thing for a country, provided things continue to progress from there.
The point about Nike from the show was that the industry leader will take the most heat for industry-wide problems. I'm sure that's a factor in Apple getting most of the negative publicity for Foxconn's abuses when plenty of electronics firms use its factories for assembling devices. Apple is also fantastically profitable, far more than the rest of the companies that have contracts with Foxconn. It has the best capacity to do something good for the workers there.
At one point, a Foxconn executive says he'd gladly double the pay of the workers on the lines assembling Apple products if the company asked for it. Using Horace Dediu's numbers, the iPhone has a 55% profit margin on an average selling price of $650. He estimates that the labor cost for each phone is somewhere between $12.50 to $30. If labor costs doubled (corresponding to a doubling of worker pay), the profit margin on each device would fall to somewhere in the 50% to 53% range. That's still an incredible margin, even for a company with typically high margins on all its products as Apple tends to have.
So while it's not completely fair for Apple to catch a lot of the heat for the issue of labor in Asia, I'm OK with it. Apple responded to getting singled out by Greenpeace by taking real actions to make its products better (or less bad, really) for the environment. Now, few companies talk about their green initiatives as much as Apple does. It's been a good thing.
Apple now seems to be doing something about the labor issue. It has publicly released factory audit results in the past couple of years and now has released a report detailing all of its suppliers. Last month, it became the first tech company to join the Fair Labor Association, and it has funded the biggest audit ever of Foxconn (currently underway).
If Apple is able to get real change for the better in Foxconn, it's even better than its green initiatives in one way. The latter only affect Apple products, but if Foxconn gets better, that affects people who make many other firms' products too. I'd like to see those other firms step up in the way Apple has, but we'll see if they do in the coming months. Pressure from multinationals that make things in China is the only way things are going to keep progressing there, as no real organized labor movement is allowed by law there.
It's not ideal if the only forward progress is due to American companies pushing the Chinese companies while themselves being pushed by media scrutiny and popular outcry, but it's at least some forward progress.
It's a weird thing for most Americans, I expect. Despite the very real issues with things like too much overtime and underage workers, most reports say that Foxconn's factories really are among the best in China. I've likened factories with dormitories to the phenomenon of company towns in America. It's not a perfect analogy, but having company towns is a phase that this country went through during its industrial development. They weren't great for workers, but they're better than subsistence farming. The same goes for Foxconn in China.
It's not that dissimilar from the sweatshop scandals that plagued Nike in the '90s. The Nightline piece had someone bring that up, though the reference was about a different point. A number of economists have argued that sweatshops are a good thing in comparison to subsistence farming, which does make them a net positive. That's certainly not to say that industrial development should get to the sweatshop stage and stop. The existence of sweatshops and cramped factories could overall be a good thing for a country, provided things continue to progress from there.
The point about Nike from the show was that the industry leader will take the most heat for industry-wide problems. I'm sure that's a factor in Apple getting most of the negative publicity for Foxconn's abuses when plenty of electronics firms use its factories for assembling devices. Apple is also fantastically profitable, far more than the rest of the companies that have contracts with Foxconn. It has the best capacity to do something good for the workers there.
At one point, a Foxconn executive says he'd gladly double the pay of the workers on the lines assembling Apple products if the company asked for it. Using Horace Dediu's numbers, the iPhone has a 55% profit margin on an average selling price of $650. He estimates that the labor cost for each phone is somewhere between $12.50 to $30. If labor costs doubled (corresponding to a doubling of worker pay), the profit margin on each device would fall to somewhere in the 50% to 53% range. That's still an incredible margin, even for a company with typically high margins on all its products as Apple tends to have.
So while it's not completely fair for Apple to catch a lot of the heat for the issue of labor in Asia, I'm OK with it. Apple responded to getting singled out by Greenpeace by taking real actions to make its products better (or less bad, really) for the environment. Now, few companies talk about their green initiatives as much as Apple does. It's been a good thing.
Apple now seems to be doing something about the labor issue. It has publicly released factory audit results in the past couple of years and now has released a report detailing all of its suppliers. Last month, it became the first tech company to join the Fair Labor Association, and it has funded the biggest audit ever of Foxconn (currently underway).
If Apple is able to get real change for the better in Foxconn, it's even better than its green initiatives in one way. The latter only affect Apple products, but if Foxconn gets better, that affects people who make many other firms' products too. I'd like to see those other firms step up in the way Apple has, but we'll see if they do in the coming months. Pressure from multinationals that make things in China is the only way things are going to keep progressing there, as no real organized labor movement is allowed by law there.
It's not ideal if the only forward progress is due to American companies pushing the Chinese companies while themselves being pushed by media scrutiny and popular outcry, but it's at least some forward progress.
Thursday, February 2, 2012
Why Don't Carriers Push Unsubsidized Phones?
Once upon a time it was possible to find a cheaper data plan if you brought your own phone to a carrier in the United States, but those days are over. Whether you buy your phone subsidized or not, you pay the same rate for data.
That fact got me thinking: why don't carriers push unsubsidized phones more?
Costs of an Unsubsidized Phone
Of course, it is a considerable expense for the customer to purchase an unsubsidized phone, especially for smartphones in particular. Verizon is the one carrier that makes it easy to see what it costs to purchase a no-contract phone on its website, so for all of the examples here, I'm going to use Big Red.
According to VZW's website right now, the unsubsidized price for the Galaxy Nexus is $649.99. That's also what a 16GB iPhone 4S costs, and the price goes up in $100 increments as you add storage to 32GB and 64GB. An unsubsidized Droid RAZR goes for that same $649.99, a Droid Bionic sets you back $589.99, and the new Blackberry Torch 9850 goes for $459.99.
Subsidized smartphones all require data plans, so it follows that the carriers probably make up for the subsidies with those data plans. When you subtract the subsidized price from the unsubsidized price, you find out how much each phone is subsidized. Divide that subsidy by 24, and you find out how much each month the carrier charges you per month to make up for the lower up-front price. Here are the subsidies for those phones:
Verizon's Profitable Zones
Verizon's early termination fee (ETF) for smartphones is $350 minus $10 per month of paid service. So, if you cancel after one complete month, your fee is $340. If you cancel after one complete year, your fee is $230.
ETFs basically exist to recoup the subsidies on phones. This must be the case because they are comically small compared to the lifetime value of the contract.
The least expensive smartphone plan on Verizon for an individual is $40 for voice and $20 for data for a total of $60 per month. That works out to $1,440 over the lifetime of the contract. The only point at which Verizon's ETF entirely covers the lost money of the plan is in the final three months, but that doesn't include any subsidy that is still being paid off. Include that factor, and it's likely to only completely cover the losses in the final one or two months.
Therefore, it's safe to say that lost value from the monthly payments on service is not a factor in the ETF. The question then becomes: when are subsidized phones more profitable than unsubsidized phones for Verizon?
The ETF plays heavily in here because someone without a two-year contract can walk without paying that fee. For the unsubsidized phone to be more profitable, the extra amount the company would have made on data versus a subsidized phone at the time must be greater than the ETF at the time minus the amount of the subsidy the customer wouldn't have paid back at the time they terminate. In formula form:
Extra data money to date > ETF - (subsidy - subsidy payments to date)
Here is a chart showing the amount by which Verizon benefits from having an unsubsidized phone at the various subsidy levels I described above. The values charted are for if a customer leaves after the number of months on the x-axis.
As it turns out, it's a very simple relationship. The amount of extra money Verizon makes per month in data with an unsubsidized phone is exactly the same as the amount of the subsidy that gets paid down every month. Therefore for any given month, it's just a matter of taking the value of the initial subsidy and subtracting the ETF for that month.
The only time Verizon doesn't come out ahead when a customer with an unsubsidized phone leaves is for the first few months with a model that normally has a subsidy less than the initial $350 ETF like with the Blackberry Torch. On all the rest of the phones, Verizon would have made more money with an unsubsidized phone no matter when the customer decides to leave.
And of course if the customer with an unsubsidized phone stays through the entire two-year contract, the amount Verizon ends up ahead on the deal is the value of the subsidy it would have offered on that model.
The Customer's Perspective
Before talking more about the carrier, let's talk about the customer.
Buying an unsubsidized phone is much more expensive than buying a subsidized one. The primary value proposition for the customer in foregoing the initial discount is the ability to take that phone to another carrier without having to pay a penalty. Well, sort of.
Thanks to the dueling GSM and CDMA standards, you can only take a standard 3G phone to one other major carrier in the US. Even world phones with both GSM and CDMA capabilities might not be transferable from one to the other thanks to carrier and device restrictions. For instance, the unlocked and unsubsidized iPhone 4S cannot be used on Verizon or Sprint.
In any event, if you buy an unsubsidized phone, you're going to want to know how big a discount you'll need to get at each month over the next 24 months to come out ahead versus a subsidized phone. You need to know when the ETF plus the amount you would have paid back towards the subsidy is greater than the extra money you put up by not getting a subsidy plus any savings per month. In formula form:
ETF + amt. of subsidy paid back > subsidy + savings from new plan
Here are a few charts of the change in the total amount you pay over the course of 24 months by choosing an unsubsidized phone over a subsidized phone and by switching to a lower cost plan in a particular month. If a number for a month is negative, that means you save money by buying having bought an unsubsidized phone and switching that month. If a number for a month is positive, that means you save money by having bought a subsidized phone and switching that month.
This is the chart for switching to a plan that costs $10 less per month:
If you and your unsubsidized phone switch to a plan that costs $10 less per month, you must do it no later than 14 months after buying that phone to make it worth it if the subsidy would have been $280. As the subsidy goes up, you have more time to wait and still come out ahead. Of course if your new carrier charges an activation fee (or more accurately, doesn't waive it), you will have to switch a month or two sooner depending on the phone.
This is the chart for switching to a plan that costs $20 less per month:
You have much longer to wait if you can swing a $20 discount, which makes sense.
The trick is that you won't be able to pull this kind of money saving switch too many times. The other way you can come out ahead with an unsubsidized phone is if you use it on a carrier that doesn't require a data plan for all smartphones regardless like Verizon does. It will take you anywhere from going 14 months without data (for an otherwise $280 subsidized phone like the Torch) up to 23 months without data (for an otherwise $450 subsidized phone like the iPhone).
Why Don't Carriers Push Unsubsidized Phones?
Subsidies are tremendously useful for the carriers. Many people who are unable or unwilling to pay the higher up front price of an unsubsidized smartphone will go for the reduced initial cost of a subsidized one. That then puts them in data plans that more than make up for that initial subsidy. Plus, advertising fancy phones for low prices, or even "free", gets people's attention.
There's no reason why carriers should get rid of subsidies. However, they can have material effect on a carrier's margins if a big selling new phone has a large subsidy. Unsubsidized phones are more profitable for them, so why doesn't every carrier do as Verizon does and make it easy to browse them as options?
Primarily, it's probably because the main advantage for the customer of getting an unsubsidized phone is being able to walk away from the carrier without paying a fee. "If you buy this, you can leave whenever you want with no penalty!" is an awkward pitch for an industry that has been built around the two-year contract. Early termination fees probably also create a mental block in people's minds that prevents them from thinking about leaving even if they can come out ahead after paying it. Plus, a customer leaving early is most often costlier than the subsidy is.
The example of a plan that costs $60 per month is possible but probably not common. Let's imagine a smartphone user who opts for a plan of $90 per month with Verizon. Let's also imagine this person bought an unsubsidized Android phone (that normally has a $350 subsidy) that can be taken to Sprint to take advantage of one of its $80 per month plans.
Let's say this person is considering switching after 12 months. Based on the math from the previous section, this will allow the person to save either $30 total or $65 if Sprint waives the activation fee. It would be worth it financially to switch.
Verizon will have collected $1,080 total from this customer at the time of this decision. If the person stays for another 12 months, Verizon will have collected $2,160 in total. If the person had bought a subsidized phone and stayed the entirety of the two-year contract, Verizon would have collected $1,810 in total (net of the subsidy). In this particular scenario, by giving the option of the unsubsidized phone the carrier is looking at an upside of $350 and a downside of $730. It had better hope its network is much better in the customer's region than Sprint's is.
As the numbers and considerations change, the upsides and downsides do too. However for almost all of the subsidies I looked at here, the carrier takes in more revenue from a full term contract than it does from an unsubsidized, no-contract customer at the points where it makes financial sense for that customer to switch carriers. Only with the iPhone's $450 subsidy versus an unsubsidized customer who switches after 19 months does the carrier no longer care (it brings in $1,710 either way).
Verizon must worry less about bleeding customers than the others because it makes it the easiest of all to shop for unsubsidized phones. I find that interesting because Verizon itself is not the low cost carrier. Big Red should be more vulnerable to being undercut on price and therefore to seeing unsubsidized customers walk away early, but it must feel confident that its network quality, amenities, and packaging deals will insulate it from mere price sensitivity.
Sprint and T-Mobile, as the low cost carriers, would seem to benefit from a proliferation of unsubsidized phones. However, they are having issues with customer loss. Pushing options that let customers leave without having to think about a termination fee might be a bad idea.
As for AT&T, your guess is as good as mine.
That fact got me thinking: why don't carriers push unsubsidized phones more?
Costs of an Unsubsidized Phone
Of course, it is a considerable expense for the customer to purchase an unsubsidized phone, especially for smartphones in particular. Verizon is the one carrier that makes it easy to see what it costs to purchase a no-contract phone on its website, so for all of the examples here, I'm going to use Big Red.
According to VZW's website right now, the unsubsidized price for the Galaxy Nexus is $649.99. That's also what a 16GB iPhone 4S costs, and the price goes up in $100 increments as you add storage to 32GB and 64GB. An unsubsidized Droid RAZR goes for that same $649.99, a Droid Bionic sets you back $589.99, and the new Blackberry Torch 9850 goes for $459.99.
Subsidized smartphones all require data plans, so it follows that the carriers probably make up for the subsidies with those data plans. When you subtract the subsidized price from the unsubsidized price, you find out how much each phone is subsidized. Divide that subsidy by 24, and you find out how much each month the carrier charges you per month to make up for the lower up-front price. Here are the subsidies for those phones:
- iPhone (all varieties): $450 subsidy; $18.75 per month
- Droid Bionic: $390 subsidy; $16.25 per month
- Galaxy Nexus, Droid RAZR: $350 subsidy; 14.58 per month
- Blackberry Torch: $280 subsidy; $11.67 per month
Verizon's Profitable Zones
Verizon's early termination fee (ETF) for smartphones is $350 minus $10 per month of paid service. So, if you cancel after one complete month, your fee is $340. If you cancel after one complete year, your fee is $230.
ETFs basically exist to recoup the subsidies on phones. This must be the case because they are comically small compared to the lifetime value of the contract.
The least expensive smartphone plan on Verizon for an individual is $40 for voice and $20 for data for a total of $60 per month. That works out to $1,440 over the lifetime of the contract. The only point at which Verizon's ETF entirely covers the lost money of the plan is in the final three months, but that doesn't include any subsidy that is still being paid off. Include that factor, and it's likely to only completely cover the losses in the final one or two months.
Therefore, it's safe to say that lost value from the monthly payments on service is not a factor in the ETF. The question then becomes: when are subsidized phones more profitable than unsubsidized phones for Verizon?
The ETF plays heavily in here because someone without a two-year contract can walk without paying that fee. For the unsubsidized phone to be more profitable, the extra amount the company would have made on data versus a subsidized phone at the time must be greater than the ETF at the time minus the amount of the subsidy the customer wouldn't have paid back at the time they terminate. In formula form:
Extra data money to date > ETF - (subsidy - subsidy payments to date)
Here is a chart showing the amount by which Verizon benefits from having an unsubsidized phone at the various subsidy levels I described above. The values charted are for if a customer leaves after the number of months on the x-axis.
As it turns out, it's a very simple relationship. The amount of extra money Verizon makes per month in data with an unsubsidized phone is exactly the same as the amount of the subsidy that gets paid down every month. Therefore for any given month, it's just a matter of taking the value of the initial subsidy and subtracting the ETF for that month.
The only time Verizon doesn't come out ahead when a customer with an unsubsidized phone leaves is for the first few months with a model that normally has a subsidy less than the initial $350 ETF like with the Blackberry Torch. On all the rest of the phones, Verizon would have made more money with an unsubsidized phone no matter when the customer decides to leave.
And of course if the customer with an unsubsidized phone stays through the entire two-year contract, the amount Verizon ends up ahead on the deal is the value of the subsidy it would have offered on that model.
The Customer's Perspective
Before talking more about the carrier, let's talk about the customer.
Buying an unsubsidized phone is much more expensive than buying a subsidized one. The primary value proposition for the customer in foregoing the initial discount is the ability to take that phone to another carrier without having to pay a penalty. Well, sort of.
Thanks to the dueling GSM and CDMA standards, you can only take a standard 3G phone to one other major carrier in the US. Even world phones with both GSM and CDMA capabilities might not be transferable from one to the other thanks to carrier and device restrictions. For instance, the unlocked and unsubsidized iPhone 4S cannot be used on Verizon or Sprint.
In any event, if you buy an unsubsidized phone, you're going to want to know how big a discount you'll need to get at each month over the next 24 months to come out ahead versus a subsidized phone. You need to know when the ETF plus the amount you would have paid back towards the subsidy is greater than the extra money you put up by not getting a subsidy plus any savings per month. In formula form:
ETF + amt. of subsidy paid back > subsidy + savings from new plan
Here are a few charts of the change in the total amount you pay over the course of 24 months by choosing an unsubsidized phone over a subsidized phone and by switching to a lower cost plan in a particular month. If a number for a month is negative, that means you save money by buying having bought an unsubsidized phone and switching that month. If a number for a month is positive, that means you save money by having bought a subsidized phone and switching that month.
This is the chart for switching to a plan that costs $10 less per month:
If you and your unsubsidized phone switch to a plan that costs $10 less per month, you must do it no later than 14 months after buying that phone to make it worth it if the subsidy would have been $280. As the subsidy goes up, you have more time to wait and still come out ahead. Of course if your new carrier charges an activation fee (or more accurately, doesn't waive it), you will have to switch a month or two sooner depending on the phone.
This is the chart for switching to a plan that costs $20 less per month:
You have much longer to wait if you can swing a $20 discount, which makes sense.
The trick is that you won't be able to pull this kind of money saving switch too many times. The other way you can come out ahead with an unsubsidized phone is if you use it on a carrier that doesn't require a data plan for all smartphones regardless like Verizon does. It will take you anywhere from going 14 months without data (for an otherwise $280 subsidized phone like the Torch) up to 23 months without data (for an otherwise $450 subsidized phone like the iPhone).
Why Don't Carriers Push Unsubsidized Phones?
Subsidies are tremendously useful for the carriers. Many people who are unable or unwilling to pay the higher up front price of an unsubsidized smartphone will go for the reduced initial cost of a subsidized one. That then puts them in data plans that more than make up for that initial subsidy. Plus, advertising fancy phones for low prices, or even "free", gets people's attention.
There's no reason why carriers should get rid of subsidies. However, they can have material effect on a carrier's margins if a big selling new phone has a large subsidy. Unsubsidized phones are more profitable for them, so why doesn't every carrier do as Verizon does and make it easy to browse them as options?
Primarily, it's probably because the main advantage for the customer of getting an unsubsidized phone is being able to walk away from the carrier without paying a fee. "If you buy this, you can leave whenever you want with no penalty!" is an awkward pitch for an industry that has been built around the two-year contract. Early termination fees probably also create a mental block in people's minds that prevents them from thinking about leaving even if they can come out ahead after paying it. Plus, a customer leaving early is most often costlier than the subsidy is.
The example of a plan that costs $60 per month is possible but probably not common. Let's imagine a smartphone user who opts for a plan of $90 per month with Verizon. Let's also imagine this person bought an unsubsidized Android phone (that normally has a $350 subsidy) that can be taken to Sprint to take advantage of one of its $80 per month plans.
Let's say this person is considering switching after 12 months. Based on the math from the previous section, this will allow the person to save either $30 total or $65 if Sprint waives the activation fee. It would be worth it financially to switch.
Verizon will have collected $1,080 total from this customer at the time of this decision. If the person stays for another 12 months, Verizon will have collected $2,160 in total. If the person had bought a subsidized phone and stayed the entirety of the two-year contract, Verizon would have collected $1,810 in total (net of the subsidy). In this particular scenario, by giving the option of the unsubsidized phone the carrier is looking at an upside of $350 and a downside of $730. It had better hope its network is much better in the customer's region than Sprint's is.
As the numbers and considerations change, the upsides and downsides do too. However for almost all of the subsidies I looked at here, the carrier takes in more revenue from a full term contract than it does from an unsubsidized, no-contract customer at the points where it makes financial sense for that customer to switch carriers. Only with the iPhone's $450 subsidy versus an unsubsidized customer who switches after 19 months does the carrier no longer care (it brings in $1,710 either way).
Verizon must worry less about bleeding customers than the others because it makes it the easiest of all to shop for unsubsidized phones. I find that interesting because Verizon itself is not the low cost carrier. Big Red should be more vulnerable to being undercut on price and therefore to seeing unsubsidized customers walk away early, but it must feel confident that its network quality, amenities, and packaging deals will insulate it from mere price sensitivity.
Sprint and T-Mobile, as the low cost carriers, would seem to benefit from a proliferation of unsubsidized phones. However, they are having issues with customer loss. Pushing options that let customers leave without having to think about a termination fee might be a bad idea.
As for AT&T, your guess is as good as mine.
Subscribe to:
Posts (Atom)