[Editorial] R.I.P. One Year Contracts

Last week, Verizon Wireless carefully announced that they were going to eliminate one-year contracts as an option for their customers.

The truth of the matter is, one year contracts likely comprise of less than 1% of overall contracts.  We have no real data on this, but a long observation of the business tells us that the numbers are minimal.

The problem, though, is choice.

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The one year contract is simply a casualty of the flawed wireless phone subsidy system.

In January of this year, Verizon announced it was doing away with early upgrades they called “Annual Upgrades,” as well as the additional subsidy for single and primary share lines after twenty months, commonly known as New Every Two.  When they made this change, they made a lot of effort to point out that they also had a one year contract option for customers wanting devices sooner than twenty months.  And now, three months later, they’re doing away with that option as well.

This gives the consumer less to choose from.  Last year, I could do a no-contract term, one year, and two year terms.  I could upgrade eight months early on a line that qualified, or I could wait for the better deal toward the end.  I had choices.

Now, I have the no-contract term, or two year.  And if I do two year, I have to wait twenty months before getting another discount, at which time there’s no incentive for me to renew my contract beyond my pressing need for a new phone.

This has happened because the carrier, who used to subsidize a standard $120 for a two year contract, regardless of the type of phone, now subsidize as much as $450 on high-end phones.  As the phone subsidy ballooned, the need to cut back on the frequency of subsidies ballooned with it.

We at PhoneCan are generally disgusted with the entire subsidy program.  Many of us are the non-contract type of people, or in the least, one year was a doable alternative to full price phones.  We believe that the problem isn’t customer demand, or deep carrier subsidies, but the manufacturer themselves.  The manufacturer of a phone makes an astronomical profit margin on a phone as compared to most any other electronic device.  Exact numbers are kept secret, but many sources are able to break down the cost of the components withing a device and deduce the base cost of a product with good accuracy.  The truth is, a $600 smartphone is possibly netting the manufacturer $200 or more in profit, less if the device is cutting-edge in nature.

We believe that the problem starts with the manufacturer gouging the distribution and service providers, knowing they will need to heavily subsidize the product and no one will really complain.  But as the manufacturer squeezes it’s customer of it’s money, that customer - the carrier - needs to squeeze money from it’s own customers: consumers.

The solution is simple: manufacturers need to stop expecting to make as much on a phone as they did ten years ago.  They don’t make a killing on TVs, Blu-Ray players, sound systems, computers, and the like, but they certainly do on phones.  And phones are now as pervasive  (if not more so) than televisions and other home electronics.  But because the overall end user doesn’t grasp the fact that a simple phone costs so much, no one complains to them that their phones cost too much.  Instead, they go to the company they directly deal with, asking for lower prices.  And as the carrier lowered prices by discounting more, they’ve come to the point where they can discount no more.  They need to make money, and the higher the cost of subsidies are, the more money they need to make to recoup that cost.

We’re at an impasse.  If anyone expects monthly prices to drop, they need to expect to pay more for phones.  But with a system where the manufacturer has carte blanche control over their profit models, the consumer has no chance at changing the system.  If the customer pays more for a phone, the manufacturer will continue it’s gilded path right to the bank.  Nothing will change.

The one year contract is simply a casualty of the flawed wireless phone subsidy system.

It wasn’t sustainable any more.  But instead of fixing it by abandoning the old system and changing how a one-year contract is subsidized, it was simply easier to eliminate it altogether.  It would have been more responsible to simply subsidize half of what’s taken off for a two-year contract.  If a phone is discounted $300 for a two year, discount it $150 for a one year.  Instead, the same $300 two year subsidy was a $230 subsidy on a one year contract.

And since that was no longer sustainable, it’s now dead.

What all this ammounts to is using a bandaid to fix a broken arm.  We can continue to alter, twist, and contort a system that should have been retired and changed years ago, or we can fix the problem from the initial cost on down to the end cost.  But that would require big companies to make less money somewhere.  Small consumers have little chance of making a change.

Most likely, in a year or two we’ll think back fondly to the days when we had more choices.  When we could decide how long we wanted to stay with a company, and how much we wanted to pay up front.  We were left with two choices: long-term on a decent network, or short term on a low quality network.

Rest in Peace, One Year Contract.