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AT&T Wants Device Subsidies to Be As Low As Possible

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Replying to:  Why not end subsidies? by kingstu   May 17, 2012, 3:06 PM

The Reason for the Subsidy

by T Bone    May 18, 2012, 4:28 PM

Many people today don't remember it but for many, many years there was a landline phone subsidy. When you set up phone service in your home or office, you got the phone directly from the phone company, and the phone was owned by the phone company and you paid a monthly 'rent' for it which was right there on your monthly bill. This was done because of the government phone monopoly.

In 1913, American Telephone and Telegraph was already the biggest phone company by a wide margin, and they also had a large part of the telegraph business. So the federal government made an agreement with the company, in exchange for agreeing to drop their telegraph service and for agreeing to provide phones to customers who cannot afford one to help spread telephone service to the common people, AT&T would be granted a legal, government sanctioned monopoly on telephone service.

So, in compliance with this agreement, AT&T began supplying anyone who signed up for phone service with a more or less 'free' (save for the monthly rent) phone.

The result was that telephone service became a lot more affordable for everyone, and telephone service started to spread. In 1913, only about 5-10% of households had phones, by 1945 it was up to 50% and by 1969 it was up to 90%. And it was all because AT&T was subsidizing the cost of the landline phones.

When the government decided, in the mid 70's, that the AT&T monopoly was no longer useful, that its goal of spreading telephone service to everyone was more or less achieved, and concluded that there was evidence that AT&T was abusing its government monopoly, the company was broken up starting on Jan 1, 1984. This is when the landline phone subsidy officially ended.

Since there was already evidence that offering subsidies for phones was an effective way to get people to sign up for phone service, and since people were already conditioned, over about 70 years, to getting their phones from the phone company, when cellular service was started, it seemed natural to extend the 'subsidy' idea to cellular phones. And it has stayed that way ever since.

I don't think that abolishing the subsidy is a good idea however.

What would be better would be what is done in many countries in Europe, where you basically have a line item added to your monthly bill e.g. 'cost of iPhone $25' every month until the full cost of the phone is paid off. Then, when it is paid in full, the 'phone rent' disappears and your monthly bill is lower.

This is the best of all possible worlds, on the one hand very expensive phones become affordable to people who otherwise couldn't get one, and on the other hand, customers are made to pay for the phones themselves, and they know the real cost of the phone, and they get to lower monthly bills when the phone is paid off.

And those who can afford it can pay off the cost of the phone in the first month if they want to rather than paying in installments.

Win win for everybody involved.

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