Carrier Subsidies Are Loans, and You Should Welcome Their Death

A blog about business and economics.
Dec. 11 2013 5:18 PM

Carrier Subsidies Are Loans, and You Should Welcome Their Death

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This woman is not your friend, she just wants your money.

Photo by Mike Coppola/Getty Images for Verizon

A very confused TechCrunch piece by John Biggs bemoans the possible future end of carrier subsidies in the American mobile phone market. The right way to think about this is that the "subsidies" aren't subsidies at all, they're loans. If you compare what AT&T or Verizon charge as a monthly rate with what a service like Ting or the new no-contract T-Mobile plans cost, you'll see that the big boys are charging a massive premium. That premium, paid over the life of a two-year contract, is the interest you are paying on your loan.

The carriers are exploiting our shortsightedness (and the fact that banks don't offer a mobile phone loan product) to get us to pay much more for "phone plus service" than we would otherwise pay.

Where Biggs is right is that a move to a nonsubsidized model would be bad for the phone-makers, since the way the carriers run this bait-and-switch requires them to throw some extra scratch in the direction of Apple, Samsung, Motorola, or whomever. But consumers would be better off. There's a reason we don't buy cars that are tied to a particular oil company and feature a two-year contract to exlusively fuel your vehicle with overpriced gasoline from one particular vendor. The only reason the subsidy model has lasted as long as it has is that spectrum scarcity makes the market for network access rather uncompetitive, and lets exploitative business models live fairly long lives. But it's not a totally uncompetive market, and the walls will and should come down.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

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