The hidden tax in your cell phone bill, and why operator retail is anti-competitive

If you have a mobile phone from AT&T or T-Mobile, or Verizon or Sprint, or Alltel or MetroPCS or Cricket, you're paying a tax that you very likely don't see on your bill. It's not a government tax. It's the device subsidy tax.

Practically every American with a cell phone bought that phone at the same store where they signed up for their cellular service - their phone number, minutes, text messaging plans, etc. Something like 95%+ of Americans who have 1-2 year cell phone contracts bought their cell phone at a discount by committing to another 1-2 year service commitment.

And why would you pay the full, 'without a contract' price for a phone when it's available at a much cheaper price with a contract, and hey, you're going to need service anyway? If the operator will subsidize the cost, why not take the savings?

This should hardly be surprising given a few seconds of thought, but AT&T is not subsidizing your iPhone, and Verizon Wireless is not subsidizing your Blackberry. They are not bearing the cost of your cell phone on your behalf. They simply include this cost, aggregated and averaged across their customer base, in the prices they charge for service. You pay the 'device subsidy' in monthly installments, as a hidden part of your bill.

Here's the catch, and the reason this device installment payment plan is really a kind of tax: you can't avoid paying it, even if you don't need or want it. The operators don't offer voice or data or texting service plans that exclude this amortized hardware charge. Sprint doesn't have a 900 minute per month 'bring your own device' plan for $15 less than the standard 900 minute per month plan. AT&T doesn't have an iPhone voice and data plan for people who bought secondhand iPhones - at least not a plan that costs less than the regular iPhone plans, which include a hefty per-month premium to offset part of the up-front cost of buying a new iPhone.

Nope, if you just want to keep using your current phone, or bought a new or used phone somewhere else, you won't pay any less than the person who signs up for a plan and gets a reduced-price phone. Part of your monthly bill will be paying the monthly installment charge for that other person's phone.

This isn't merely unfair, it borders on being anti-competitive. It's not coincidence that nearly everyone in the US buys their phone from the same people who sell the service. The operators desperately want to control where, how, and under what conditions you buy your phone. And every single one of them in the US has only one type of plan - the 'we include the cost of your hardware' plan. Every single one. Because phones really are rather expensive, even in 2009, Americans have been been lulled into accepting the bargain from the operators, and have become accustomed to only paying up front for part of the cost of their phones.

It matters where you buy your phone, because different retailers configure the same phone models differently. If you buy your phone from AT&T, it comes with locks you might not be aware of - it will be locked to only operate when an AT&T SIM card is in the phone (and not, of course, a T-Mobile SIM), and it will have the 'administrator' for the phone set to AT&T. When you buy a Dell from Best Buy, Best Buy isn't configured as the administrator account, and Best Buy doesn't use that administrator account to set rules on what applications you are allowed to install, or how you use your computer. But AT&T does this on your phone, so that 'the network is protected'.

Now if you were to buy the exact same model of phone from Nokia.com, or Amazon, or one of the lesser known 'pure-play' phone retailers, none of these locks would be present. You could use a SIM from any operator and the phone will operate. You can install any application that you want. You could update the phone software with newer versions without breaking the law or voiding your warranty.

But buying phones from retailers other than the operators is horribly expensive - normally $150-$400 more expensive than buying the same phone from the operator. It's a classic bundling scheme. And there isn't an 'unbundled' option - actually there is an unbundled option, at least at AT&T and T-Mobile, and the service costs exactly the same as the full bundle.

Until one of the major operators offers a lower priced bring-your-own-device option, you will continue to buy your phone from their stores. They've blocked the non-operator retail channel from competing, since a phone without service is pretty much useless.

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