A secondary exchange for Anywhere devices

Yankee Group colleague Andy Castonguay recently published a killer report predicting the near-inevitable death of mobile phone subsidies (actual title: The Golden Subsidy Egg’s Goose is Cooked). One of the points he makes is that carrier subsidies mask the actual cost of the Anywhere devices that consumers are buying. To pay back those subsidies, carriers lock consumers into long-term contracts they may not actually want. I recently saw a store sign that nicely illustrated some of the real prices of mobile devices.

Every day I walk over the top of Boston’s Beacon Hill on my way from the train to Yankee Group’s office at One Liberty Square in the Financial District. Last week, I chose a path that took me down toward Downtown Crossing, and I ran across the white board shown at the right in the window of one of the shops along the way. I was so struck by the image that I grabbed a picture of it with my mobile.

So what should consumers take away from this primitive secondary market for mobile devices? I came away with three immediate observations:

1. Unsubsidized mobile phones vary significantly in price. If you walk in and pay cash, you can walk out with a 16 GByte iPhone 3GS for about $700. On the other hand, an HTC Touch Pro 2 is only $525 and a Blackberry Tour is $450. Those are big differences among phones that claim to provide roughly similar experiences.
2. Carrier subsidies mask phone cost differences quite effectively. Buying those same phones—the iPhone 3GS 16 GByte, the HTC Touch Pro 2, and the BlackBerry Tour—with line activation and subsidy would cost you $199, $349, and $149 respectively. Suddenly, that expensive Apple hardware looks pretty cheap, while the HTC phone looks premium-priced. Yes, the differences in hardware prices will all be addressed by your monthly payments over two years, but almost no one does that calculation, nor are operators advertising that you eventually pay those phone subsidies, one way or another.
3. Someone has figured out how to get out of AT&T iPhone contracts. Given that US iPhones are only sold with 2-year AT&T commitments, the interesting question is how this store managed to get a supply of iPhone 3GSs to sell. Yes, selling your phone for nearly $500 will help you with your payments for a few months, but at the end of the day, someone is still committed to paying the roughly $1,700 in service commitments necessary to fulfill a 24-month contract at $70 a month. I can only conclude that someone has figured out how to break the AT&T contract and yet keep their phone. Alternatively, perhaps the store is capitalizing on consumers who trade down from an iPhone to a different phone on the AT&T network, but who still is willing to pay the monthly fees. Or, maybe the store is just tapping into the international gray iPhone market.

In some ways, this store is distilling down mobile phone contracts the same way Wall Street takes apart financial obligations: they’ve created a secondary market for the phones separate from the bundled hardware/service contract. As Andy points out in his report, both consumers and mobile operators would be better off if mobile phone contracts didn’t use subsidies that created such complicated contracts, simply because the costs and profits would become obvious to everyone involved. But until then, secondary markets such as the one noted above help us understand the real prices of mobile phones.