Understanding the Economics of the Wireless Industry


The wireless industry does tend to boggle the mind at times. Wireless providers are spending money suing over how ads are phrased instead of using that funding toward improving services or discounting prices. Understanding the economics of the industry seems to have baffled traditional economic ways of thinking as well. Our friends over at The iPhone Blog shared a New York Times article that tried to make sense of the cellphone industry's economics.

According to Barry Nalebuff, an economics professor at Yale, "The whole pricing thing is weird. You pay $60 to make the first phone call. Your next 1,000 minutes are free. Then the minutes after that costs 35 cents.". In most business models, discounts are given to customers who buy more but the cellphone industry penalizes those who go beyond their plan.

The wireless industry uses the overage fees to motivate consumer to buy a bigger bucket of minutes to avoid the per minute fees. Consumers often choose the plan that avoid monthly penalty regardless of how many minutes are left on the table at the end of the month.

The one thing that stood out in the article was the commentary on subsidized (or discounted) phone prices. According to John Hodulik, an analyst for UBS Securities, the industry is trying to get away from big subsidies and would prefer consumers would pay full price for the phones. Consumers on the other hand like the discounted prices even if it costs them more in the long run.

Take the iPhone example in that AT&T initially wanted to the phone to cost $599, later cut it to $399, and required a $20 data package. Sales were good but when the iPhone dropped to $199 and the data increased to $30 a month, the sales skyrocketed.

So, is the economics of the wireless industry simply unique or an abnormality within the business world? Do you believe it's better to buy a bigger bucket of minutes to avoid overage fees or do you shop for the lowest cost per minute?

Phil Nickinson

Phil is the father of two beautiful girls and is the Dad behind Modern Dad. Before that he spent seven years at the helm of Android Central. Before that he spent a decade in a newsroom of a two-time Pulitzer Prize-finalist newspaper. Before that — well, we don't talk much about those days. Subscribe to the Modern Dad newsletter!

  • Citing the iPhone in the example above: consumers were still locked into the 2yrs. If I'm going to pay full price on a phone (which I have done) I do NOT want to be locked in at all. ATT, et al, want their cake and eat it too. They don't want to subsidize the phone, but still want to make it very hard for you to leave.
  • Consumers tend to ignore the long term expense of an item. The total cost of ownership was a lesser factor in their purchasing decision. When the "out the door price" of the iPhone dropped it was marketed as the iPhone being cheaper and that's exactly how the consumers see it. All other expenses get little attention.
  • Thanks for this write-up, George. I have wondered about this myself, and have done the math, which seems to add up very well for the wireless carriers but is a huge drain to the consumers. It is common under many plans that the device of choice ends up costing the consumer approximately double. I have never lived in Europe or Asia, but it is my understanding that the consumers pay full retail for the phone of their choice first, and choose their carrier second. Over the long term (2 year contract) it is actually less expensive. With the current plethora of smartphones available, maybe one of the upcoming trends will be moves in this direction. Device price wars and plan price wars. Maybe that would be good for the consumers.
  • Well , both in Europe and Australia the phones tend to be FREE with a 2 year contract, usually from A$59 / month up. If you bring your own phone, you may be locked in a contract for 2 years, but you can chose a lower level contract to suit your budget, as you don't have to cover the phone cost and if you want to leave the Early Termination Fee will be a lot lower.
    Here in Australia the Early Termination usualy is calculated as follows:
    -number of months remaining on the contract multiplied by the monthly cost (say A$59)....
    So sometimes you may find the Early Termination Fee can go up to 6-7-800 :-(
  • Its hard to compare to countries like Europe because all of the carriers use the same frequency bands so phones arent an issue like they are here- CDMA, HSPA 850/1900, and HSPA 1700 (Tmo). They arent so segmented so you really can buy one phone and use it on any carrier. But thats not completely the carrier's fault, thats the spectrum our government offered them instead of requiring uniformity. I think before a few months ago, all of the carriers basically has similar costs- $39 for 450-500 min. The problem is that only the struggling carriers have to offer super package and unlimited deals to attract customers, or else they like wouldnt be! So its hard to say whats "better" value-wise. The struggling carriers like Sprint and Tmo have their problems, because after all, if it was SUCH a great deal theyd be gaining customers not both losing. There's a lot of issues like proprietary networks- WIMAX just isnt catching on for Sprint beyond other internal problems, and Tmo's 3G uses the 1700 band no one else does leaving you getting a Tmo branded device (whatever they offer) or not having 3G. It defeats a lot of the GSM advantage of SIM cards. With minutes, they have unlimited plans now on every carrier so they really are upselling the big talkers to that. Our voice monthly rates are still lower than other countries per minute though so its really hard to complain much even if it seems high to us. Go to Europe and your cost for those minutes can almost double. Id personally rather pay more for the device and pay less in the long run. You end up paying more in the end for the phone then paying the extra $150 up front. But of course people are always out for a "deal" (on its face maybe) without thinking ahead. I think people just like to whine about the wireless industry just because. They want to pay less and get more, but the carriers are a business after all not a charity. When data use goes up and they cap it at 5GB people go nuts. Honestly? If youre using 5GB of data on your phone then youre abusing the system for others trying to use data (especially in your area/on your tower). All the sudden streaming this and that is the craze and people just expect carriers to INSTANTLY have these huge dump pipes for data so they can do whatever they want. IMO thats just a selfish attitude of wanting what you want when you want it, not reality.
  • Question: If you buy the phone outright, how is it costing less in the long run? The plans still cost the same. So over 2 years, you still pay the same amount for the same plan, and pay more for the phone. Am I missing something?
  • I think what isnt being taken into consideration is that most smartphones on all carriers require a data plan whether you are on contract or off. It is definitely easier to bypass that with ATT due to the sim card but for customers like me who are on verizon, or sprint and T-mobile, your phone has to be registered and programed. This means that verizon knows what phone you are using and since i have the touch pro 2 they will require a data plan. so when i decided to resign my contract and get my new phone, it WAS becuse i want/need a data plan for everyday use anyway, and i have no plans of switching carriers. This meant that i didnt have to worry about the Contract Break Fee. So there really wasnt a reason to not take the subsidy. If i take it then ive simply saved $300. If io dont take then i still have to have a data plan and ive saved no money at all. The only problem would come if i decide to break contract, which i have no desire to do.
  • Part of the reasoning for requiring those data plans are customers will switch to PPU and then rake up huge bill and call in wanting credit. Rather than keep doing that (those calls end up costing a lot of labor hours within the call centers), they decided that you just HAVE to have the plan. Also, thanks to all the phones they're making geared towards texting (QWERTY keyboards), now was the perfect time to switch the smartphone requirements. A 2 year contract will save you money in the long run on the device if you plan for staying the whole 2 years. The companies need to recoup their money on those devices. Keep in mind, your prices plans also go towards increasing network coverage, etc. It isn't quick to add new towers either. That's why you see AT&T buying lots of smaller companies because the towers alone make it worthwhile. As new technologies come out, instead of expanding the network outward more, they have to go back and add on to what's already existing. Verizon is ahead of AT&T in that area, but that doesn't mean AT&T isn't trying. Take, for example, Colorado. AT&T recently revamped Colorado because all this stuff people are streaming to their phones now, etc. was taking such a huge bandwidth, upgrades had to be made to keep up with demand. Crazy how this stuff works, eh?
  • i saw that nytimes article a few days ago. it does point out some interesting issues. phone companies will not change their pricing much until something disruptive catches their attention. what might that be? voip from google as recently announced, or from anyone else for that matter. it's going to get interesting over the next 2 years.
  • I personally like having an unlimited everything plan... Yes I'm being charged a premium, but I've never looked back after switching. Trying to make sure I was always under my minutes and texts was stressful at times, so for me it is worth the peace of mind.
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