I expect you know how much your laptop, digital camera, and MP3 player cost. However, you probably have no idea how much you paid for your mobile phone. The acquisition cost of a smartphone can range from free to £500, but the real price is usually hidden behind calculations based on contract charges, termination fees, and usage estimates.
As we all know, £500 smartphones are never free, but network operators can price them at £0 by overcharging for phone calls and by collecting cash from the people who call you from landlines. These are the termination fees that regulator Ofcom is trying to slash, and they are, in effect, a hidden subsidy paid to the mobile phone industry.
The bundling approach helped when the industry was starting up. It made sense for network operators to control their own networks, including the handsets, just as BT (or the General Post Office, before BT was created) controlled the old black phones with big dials. It made sense to cross-subsidise early mobiles because otherwise very few people could afford them, and the new networks -- which cost a lot to build -- would be underused.
But at some point, the mobile phone industry has to grow up. These subsidies have now become anti-competitive, because they hide the real costs, and because they restrict user choice. In general, you are not allowed to choose the best phone, the best service, and the best price for the usage you want. Instead, you have to hunt for the “best package” from thousands of confusing options.
Today, there is no excuse for this sort of marketing, and governments should ban it.
If we prevented networks from cross-subsidising mobile phones, everyone would know how much each mobile phone cost. Competition would then drive down prices. Users would be able to choose the phones with the best price/performance for their needs, rather than the ones that the networks promote by, for example, giving them bigger subsidies.
In fact, we could start to see this with mobile phones based on Google’s Android operating system, because dozens of manufacturers have access to the same code. This should drive prices down to the point where they are actually based on production costs.
Without their package-deal lock-ins, the phone networks would also have to adopt more transparent pricing mechanisms. There’s no reason why consumers should not be able to buy as many minutes of talk-time, or as many text messages, as they want from any of the networks. Again, if they could do this, open competition would drive down prices.