Consumer groups in Washington have long decried the wireless industry practice of offering consumers subsidized handsets in exchange for term contracts subject to early termination fees. These consumer groups believe that consumers would be better off paying full price for handsets without an early termination fee. But how do consumers really feel about this issue when they are given a chance to vote with their wallets? It turns out they opt for subsidized handsets with early termination fees.
Google’s Nexus One is the latest example of this disconnect between consumers’ Washington representatives and actual consumer behavior. For those who aren’t familiar with the Nexus One, it is a smartphone that uses Google’s Android mobile operating system. The smartphone is sold via Google’s website at a full price of $529 unlocked (i.e., for use with any compatible network), or at a subsidized price of $179 with a two-year T-Mobile contract. (According to Wikipedia, T-Mobile contract plans cost $20 per month more than non-contract plans.)
Initially, analysts predicted that as many as 3.5 million Nexus One phones would be sold in its first year. However, in a note Goldman Sachs published this week, it reduced its forecast to 1 million phones, if Google launches a second phone, enhances its marketing effort, and sells its phones in retail stores as well. What’s more interesting is that, on the Nexus One website, the subsidized T-Mobile version ($179) was sold out, while the contract-free version ($529) was readily available. Although I don’t have information regarding the number of subsidized sales versus non-subsidized sales, this is nevertheless a strong indicator that, when consumers vote with their wallets, they prefer subsidized handsets with contracts to full-price phones sans commitment.
It shouldn’t be a surprise that consumers view mobile phones, including smart phones, very differently than desktop computers. When consumers buy a mobile phone, they are purchasing an integrated service, complete with built-in customer service. When a consumer buys a desktop computer, they may or may not connect it to the Internet, and if they do, they don’t expect the kind of customer service that is routinely provided in the mobile marketplace. Consumers also tend to view their mobile phones as relatively expendable in comparison to desktops – and thus not worth large expenditures. How many people do you know that have had the same mobile phone for more than a year or two? I don’t know very many people who haven’t lost or broken their phone within a couple of years of purchase. My guess is that, at a price-point of more than $500, a full-price Nexus One just doesn’t look very attractive to the average consumer.