| | Re: Contracts. Why?
At 09 Jan 2008 18:44:13 +0000 Thomas T. Veldhouse wrote:
> And what I have been saying is they don't really discount those prepaid
> at all ... or very rarely.
I strongly disagree. Often the prepaid models are the same current models
the carriers offer to contract customers (although typically low-end,
understandably- there's little point offering mobile TV enabled phones to
customers who can't buy the TV service on prepaid plans!)
> Most are phones that were high volume sellers and
> became excess inventory, so they sell those as prepaid [or offer them as
> "free" to subsidized customers]. Clearing excess inventory that they
> otherwise write off because they need room for newer more profitable
> makes a lot of sense ... and thus, the prepaid companies tend to be
> subsideries or completely different companies altogether that got to buy
> phones on clearance.
Look at Virgin's or Tracfone's offerings- these are handsets that were
never sold by the underlying carrier, and have custom UIs to support the
MVNO. There's no way Tracfone is buying those $15 retail Motos for less
than the $10 they sell them to Target or Walmart for. According to the
trade papers, the lowest end phones currently manufactured wholesale for
$30-40US, and these are featureless monochromatic-display models you and I
will never see at WalMart- they're built for carriers in emerging nations.
> I bet buying one of those $30 prepaid phones provided
> a net revenue of $15 for the carrier offering the pre-paid phone, even if
> is never activated ...
Unlikely- an MSRP $30-40 prepaid phone probably is sold to the mass market
retailer for 60-70% of that (Walmart wants to make a buck as well!) T
ere's no accounting depreciation trickery that can make it profitable to
sell a new handset to WalMart for $20 without the expectation of future
> because the phone is not worth $30 to them, but, in teh
> case of my example, only $15.
Not a chance.
> BTW ... it is such inventory price depreciation that they write off, not
> subsidies ... just referencing another part of the thread.
I'm not so sure. Customer acquisition cost, including a subsidy, is a
legitimate cost of doing business, not a capital invenstment, and could be
written off- not as a depreciation, but as a loss- it's not a lease- it's a
sale. (At least that's how I did it when I was a cellular dealer- I sold
the "free" phone at a $200 loss, which was offset by the $300 commission
from my carrier, resulting in a $100 profit.)
> They didn't lose money on that Sanyo phone the sold this guy because the
> isn't worth to them as much as he paid for it in the first place [hence
> made a profit]. That is why the cheap comittment free pre-paid phones are
> older models [or some current models where inventory is well in excess of
> it should be], the phone is now worth less to them, so they sell them for
You're overthinking this- prepaid phones (at least those sold outside a
carrier's own corporate stores) are packaged in different retail packaging,
with different manuals ad inserts, often with different (fewer) included
accessories- they aren't excess inventory reboxed in blister packs to sell
at Walmart- these particular phones were always intended to be sold as
> The goal is to not have to write off any losses at all and that is what
> these phones do for the carriers; they take a loss due to depreciation
> to some pre-paid guy buying the phone and using it on another carrier ...
> goal was to get rid of the phone, not whether it was activated or not.
Not true, particularly in the case of a carrier like Verizon with
"exclusive" models. Look at Verizon's low-end- twenty virtually indentical
sub-$50 retail (subsidized) flip phones from a variety of manufacturers
with virtually identical (lack of) features. These phones' mothers
couldn't tell them apart. Now look t Verizon's retail prepaid low-end
(sub $50) one blister-packed model in "Verizon InPulse" packaging- a
Samsung (or is it Starcom, I forget?) recently replaced a Nokia 26-
something that held the niche for a year. If your theory was correct, we'd
see a steady rotation of discontinued or overstock product as the low-end
prepaid model du jour, but we don't- the prepaid lineup is stable, and
bears little relation to the current postpaid lineup.
> To the guy who bought the Samsung at Walmart ... did you ever price that
> to what is available on Ebay as new for the same model? I bet the price
> similar or even higher at Walmart.
Actually I found the opposite- when I wanted to buy a low-end Verizon phone
to use on PagePlus prepaid) eBay's prices were similar or higher than
Walmart's. Luckily I stumbled upon a good deal on an old Samsung WinMo
smartphone on eBay, since PagePlus (and Verizon, I suspect) are offering
free 1X data on prepaid (most likely by accident) which allows me
Contacts/Calendar sync with my Exchange server and IMAP e-mail access,
which the low-end prepaid phones wouldn't.
To summarize, prepaid handsets ARE subsidized, but to a lesser extent than
postpaid obviously. Rather than using a contract to "enforce" recouping
the subsidy, Verizon relies on "incompatibility" with other carriers (Sprint,
Virgin, etc. won't activate Verizon handsets, AT&T and T-Mo can't), and GSM
carriers use SIM locks to enforce use of prepaid handsets on the "right"
network. Undoubtedly, some handsets end up on the "wrong" network,
resulting in the "loss" of the subsidy, but this represents a small number.
What will be interesting is how the prepaid landscape changes in this new
supposed era of "open" networks (which I'll believe when I actually see it!)
I suspect prepaid models will become far more crippled than their
postpaid counterparts (i.e. data capabilities disabled) to discourage use
on other networks. For example, some T-Mo prepaid phones have the ability
to edit the GPRS access point disabled, so even if SIM-unlocked, would work
for voice only if used on AT&T or overseas, greatly limiting their appeal
if used off-network.