In some countries, the least expensive way to buy a mobile phone is with a contract. Even if you're Paris Hilton. When one adds up the cost of a 12 monthly payments, the phone often still costs a consumer less to buy than they could buy it without a contract. Look at the secret deals a mobile operator will often offer at the end of a contract to customers who are quite happy with their current phone. Threaten to switch operators you might get offered a contract which is effectively free for the following year.The reason, of course, is operator subsidy. The operator sells the consumer a phone for below cost price -- sometimes even free -- in order to lock them into a 12, 18, or 24 month contract. Some 30% of the published monthly contract price is accounted for by subsidy clawback. This is a classic razor and blades business model.
Operators have huge buying power and so can source the devices for far less than a consumer would pay. Operators will also usually ensure that the phone is locked to their network, making it difficult for a consumer to switch service to another operator -- known as a SIM lock. Such subsidy business models are common in countries like the UK, Germany, and to an extent the US (at least for GSM operators). They are however illegal in some other countries.
However, this is changing. Although many consumers are happy to upgrade their phone every year -- essentially as a fashion statement -- increasing numbers of people are wising up to the way the industry works. They've realized that they can pay far less by keeping their phone and negotiating a lower tariff. This shift has been enabled by two key factors:
- Back-street unlockers -- the ability to remove the SIM lock, allowing the user to switch operators.
- Number portability -- the ability to move to another operator yet keep one's number, which is a strong bargaining chip.
