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Friday, May 14, 2010

 
Google, Nexus One, Subsidized Handsets & Consumer Choices
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Google has just announced that it is ending web-only sales of its unsubsidized Nexus One smartphone. The company had hoped to created a very different kind of business model for mobile phone retailing, but it just didn't work and so they are ending the experiment.

There are a couple of reasons that it probably didn't work, but the one thing that just about everyone is pointing back to is the difficulty of acclimating Americans to the actual cost of an unsubsidized handset. Over at Ars Technica, Peter Bright points out:

A one-off payment of $529 is hard to stomach. In many countries, we're not accustomed to paying so much for mobile phones, as normally their true cost is hidden--we pay less up front and commit to paying a monthly fee for 12-24 months. Only those brave souls who were willing to stump up for the early termination fee would get any idea of the true cost of their handset. In a world of subsidized handsets, then, the Nexus one felt very expensive. It's true that SIM-only contracts are cheaper than with-handset ones, but the difference rarely feels significant enough to justify buying a full-price phone--much better to pay a little bit more each month and avoid the up-front cost. Even if you do the math and work out that the Google way is cheaper, there's still the unpleasant prospect of spending so much at once.

And Kevin C. Tofel of GigaOm concludes:

it seems clear that the majority of U.S. consumers still aren't ready to adopt the unsubsidized handset model that Europe and other areas use. People here gripe about their 2-year contracts, but aren't willing to go contract free by paying full price for a new handset. I'm done griping, as evidenced by my own purchase of a Nexus One for $529 in January. I have the freedom to switch phones or carriers without an ETF, or Early Termination Fee, and I pay $20 a month less for my plan than a subsidized customer does for the same plan. Either I'm still in the minority or I was raised in Europe in a past life.
They're right. We Americans are somewhat hooked on subsidized handsets, even if the math doesn't make sense in the long-term. But is there anything wrong with this value preference? In my opinion, this is just another of the many value judgments that many people make -- and which I do not necessarily share -- but which are perfectly understandable. We Americans are a pretty demanding lot, and when we want something, we usually want it right now--and at the cheapest up-front cost we can get. [That might be why we are hooked on credit cards--and debt!]

However, if you were to believe some of the ranting and regulatory pleadings of academics like Tim Wu and analysts at the New America Foundation and Public Knowledge, the lack of unsubsidized and unlocked phone options is the sign of massive market failure. They've called for all sorts of heavy-handed regulatory intervention into the wireless marketplace on these grounds and others, which all been subsequently shown to be pure bunk.

In the case of subsidized handsets, they essentially wanted mandatory unbundling of handsets and an end to exclusive contracts that gave us a nice phone at a dirt-cheap price up-front, so long as we took the 2-3 year service contract. Contracts like these exist in countless other markets, of course, but the regulatory advocates wanted us to believe that in the mobile marketplace this constituted an egregious harm that should be remedied by regulatory intervention. But as Cord Blomquist pointed out here back in 2008, "forcing unbundling... means banning subsidized phones [which is] taking away consumer choice." Exactly right. Why shouldn't we have the right to choose subsidized handsets even if they cost us a bit more in the long-run?

Regardless, Google's experiment with the Nexus One certainly has something to teach us here, no? I mean, if Tim Wu, New America Foundation and Public Knowledge would have been right, people should have flocked to this model in droves. But they didn't. It failed. And it can't be because of the quality of the underlying product. Just about everyone agrees that the Nexus One is a best-in-class phone, or something close to it. And I doubt it's because people needed to "kick the tires" and play with the phone first. Tons of people have ordered iPhones and Droids sight unseen. Some have also suggested that Google's customer support wasn't up to snuff. I'd have no idea if that's true, but that might be plausible reason for lack of uptake.

At the end of the day, however, it's hard to avoid the sticker shock associated with an up-front payment of $529. That's really difficult for some people to swallow -- and it's also why subsidized phones are likely here to stay. And that's certainly not cause for concern or regulatory intervention.

posted by Adam Thierer @ 6:35 PM | Economics , Wireless

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Comments

$529 is a lot agreed but there are many who can afford it-the problem i think lies in those who can't afford it but buy it anyway not shopaholics but people that want the latest gagdets

Posted by: mobile at March 17, 2011 6:11 PM

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