Contracts. Why?

On Tue, 08 Jan 2008 20:50:32 -0700, Todd Allcock <elecconnec@AmericaOnLine.com> wrote:
> Having said that, unlike most carriers who seem to offer prepaid as a "last
> resort" for credit-challenged consumers, and at a price designed not to
> cannibalize their bread-n-butter postpaid biz, T-Mo aggressively pursues
> the pre-paid market, seeming to assume that anyone their prepaid offering
> lures from pstpaid is likely a high enough volume user that it'll be worth
> it. That seems to work for them, considering that their prepaid ARPU is
> (relatively) high, and their total ARPU is also relatively high considering
> their high percentage of prepaid customers compared to other carriers.

The cost to T-Mo for a prepaid customer is probably a lot lower than
their cost per post-paid customer. There is a customer support
organization for both, but all the freebies, billing, billing support,
payment processing, collections, etc. are only for post-paid.

The only ongoing costs for a "glove box" phone on prepaid are the
minutes that are actually used, and a tiny bit of the amortized
infrastructure necessary to deliver service (from the cell tower to
providing a means to refill the minutes). Probably the most expensive
(costly) t-mo prepaid customer is the one that buys a phone, uses the
allotted minutes just before they expire, then replaces the phone.

sdb
--
What's seen on your screen? http://PcScreenWatch.com
sdbuse1 on mailhost bigfoot.com

In alt.cellular.sprintpcs CozmicDebris <isheforreal> wrote:
>
> It is clearly a loss. The monthly charge paid to the company is for
> services rendered to use the phone, not equipment subsidized. This is
> clearly stated in every service agreement.
>

You know very well that a subsidy is not a loss on the balance sheet; it is an
expense. To make a profit, they have to earn more revenue than they put out
in expenses [which include the subsidy, labor, infrastructure and other fixed
costs]. A loss is only if they fail to net a profit. Another write off [or
loss] is depreciation, and that clearly is a category that a subsidy does NOT
fall into [although it is a category their inventory of phones can fall into].


> In any event, every carrier reports the loss as a seperate line item on
> their quarterly financials, and has done so for years. The government
> (specifically the IRS and SEC) do not share your opinion. Grocery stores
> and other big box stores get to right off the loss on their loss leaders
> (products sold below cost to generate traffic)- this is no different.
>

Yes, it is for depreciation of depreciable assets. Company vehicles,
depritiating inventory, even infrastructure all allow for that kind of loss.
A subsidy, however, is NOT a loss, it is an expense.

--
Thomas T. Veldhouse

America is the country where you buy a lifetime
supply of aspirin for one dollar, and use it up in two weeks.

In alt.cellular.sprintpcs Todd Allcock <elecconnec@americaonline.com> wrote:
>
> I guess that depends on your POV. I find the subsidy and EFT are in each
> other's ballpark, at least.
>

It really depends. Some of the phones they give away for "free" when you sign
up, are often old inventory that they want to clear for newer models and are
perhaps worth $30 to them on the balance sheet. So, you get a free phone that
is worth perhaps $30 to the carrier, but to quit you owe them $175, well, that
is quite a deal for the carrier no matter how you look at it. Basically, if
you buy new high end models in demand, then you are probably closer to that
equitable case where ETF is close to the subsidy.

> You also are no longer under contract, either. I liken it to a magazine
> subscription- a subscription is cheaper per issue than the "no committment"
> newsstand price. Instead of a service discount for your two-year
> "subscription" you get a phone subsidy.

It is really a source of revenue to the carrier ... they really hope users
keep the same phone for years or upgrade hardware, plans and re-contract.

It is this reason why the retention department is usually able to accomodate
you, because they know that it is free revenue anyway.

--
Thomas T. Veldhouse

America is the country where you buy a lifetime
supply of aspirin for one dollar, and use it up in two weeks.

Sorry for the top post here, but it is easier to address all your comments in
one place.

First, yes, it is possible there are a few subsidized pre-paid model phones
[carrier locked], but it is also clear that the business model is such that it
is not the case for the vast majority of cases. In fact, if it was, a
competitor could simply buy all the retail assets of a smaller competitor and
not activate service and quickly put them out of business. A company can not
operate under such a business model.

What you failed to do was address depreciated inventory along the entire
supply chain. I illustrated this for the carrier only, but not the
manufacturer or any other part of the supply chain. Any part of the supply
chain will, at some point, find it has significant quantities of depreciated
inventory, and it is this that turns into the "free" or very low cost phones
used to capture new customers (i.e. buy this phone and get three free) for
pre and post paid customers. The difference is that the subsidy is part of
the business model for post paid, because they have a contract with ETF
penalties to support it. With pre-paid, they largely rely upon the inventory
depreciation [somewhere along the supply chain] to offer low cost phones.

In summary, any subsidies on pre-paid contractless phones are almost certainly
not the standard business model [especially for GSM based phones and carriers
where unlocking a phone is common place], it exposes a carrier to a lot
of risk that a phone will be purchased and not used on their plan (Grandma has
her E911 backup in her car).

In alt.cellular.sprintpcs Todd Allcock <elecconnec@americaonline.com> wrote:
> 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
> phones
>> 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
> would
>> otherwise write off because they need room for newer more profitable
> models
>> makes a lot of sense ... and thus, the prepaid companies tend to be
>> subsideries or completely different companies altogether that got to buy
> these
>> 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
> it
>> 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
> airtime purchases.
>
>> 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
> the
>> 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
> phone
>> isn't worth to them as much as he paid for it in the first place [hence
> they
>> 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
> what
>> it should be], the phone is now worth less to them, so they sell them for
>> less.
>
> 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
> prepaid models.
>
>> 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
> not due
>> to some pre-paid guy buying the phone and using it on another carrier ...
> the
>> 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
> phone
>> to what is available on Ebay as new for the same model? I bet the price
> was
>> 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.
>
>

--
Thomas T. Veldhouse

America is the country where you buy a lifetime
supply of aspirin for one dollar, and use it up in two weeks.

"Thomas T. Veldhouse" <veldy71@yahoo.com> wrote in
news:5unabiF1imehhU5@mid.individual.net:

> In alt.cellular.sprintpcs CozmicDebris <isheforreal> wrote:
>>
>> It is clearly a loss. The monthly charge paid to the company is for
>> services rendered to use the phone, not equipment subsidized. This
>> is clearly stated in every service agreement.
>>
>
> You know very well that a subsidy is not a loss on the balance sheet;
> it is an expense. To make a profit, they have to earn more revenue
> than they put out in expenses [which include the subsidy, labor,
> infrastructure and other fixed costs]. A loss is only if they fail to
> net a profit. Another write off [or loss] is depreciation, and that
> clearly is a category that a subsidy does NOT fall into [although it
> is a category their inventory of phones can fall into].

All fine and dandy- none of it applies here. And I don't need the
accounting lesson, so you can save it for someone that does.

>
>
>> In any event, every carrier reports the loss as a seperate line item
>> on their quarterly financials, and has done so for years. The
>> government (specifically the IRS and SEC) do not share your opinion.
>> Grocery stores and other big box stores get to right off the loss on
>> their loss leaders (products sold below cost to generate traffic)-
>> this is no different.
>>
>
> Yes, it is for depreciation of depreciable assets. Company vehicles,
> depritiating inventory, even infrastructure all allow for that kind of
> loss. A subsidy, however, is NOT a loss, it is an expense.
>

No- that is another seperate line item. You should look at a few 10-Q's
and then come back when you know what I'm speaking of.

And trying to convince me of your point of view is useless- I don't make up
the accounting rules for the industry. I simply stated a very publiv piece
of knowledge.

In alt.cellular.sprintpcs CozmicDebris <isheforreal> wrote:
>
> No- that is another seperate line item. You should look at a few 10-Q's
> and then come back when you know what I'm speaking of.
>
> And trying to convince me of your point of view is useless- I don't make up
> the accounting rules for the industry. I simply stated a very publiv piece
> of knowledge.

Really? Very public? How about a link?

--
Thomas T. Veldhouse

America is the country where you buy a lifetime
supply of aspirin for one dollar, and use it up in two weeks.

"Thomas T. Veldhouse" <veldy71@yahoo.com> wrote in
news:5uo4hbF1ja9eqU1@mid.individual.net:

> In alt.cellular.sprintpcs CozmicDebris <isheforreal> wrote:
>>
>> No- that is another seperate line item. You should look at a few
>> 10-Q's and then come back when you know what I'm speaking of.
>>
>> And trying to convince me of your point of view is useless- I don't
>> make up the accounting rules for the industry. I simply stated a
>> very publiv piece of knowledge.
>
> Really? Very public? How about a link?
>

www.sprint.com

www.verizon.com

www.att.com

Go to any of their investor pages and pull up any one of their quarterly
reprts that are filed with the SEC. Each and every one will have a line
item for equipment subsidies.

It doesn't get any more public than that. And you can argue the semantics
of the terminology used all you want- that's not going to change the
reality of the situation.

At 10 Jan 2008 21:44:50 +0000 Thomas T. Veldhouse wrote:

> First, yes, it is possible there are a few subsidized pre-paid model
phones
> [carrier locked], but it is also clear that the business model is such
that it
> is not the case for the vast majority of cases.


Go to the website of any major carrier, and compare the prices of their
prepaid phones to the same models unsubsidized without contract. The
prepaid version is less- usually far less.

According to posts on Howard Foums (I'm not a Verizon customer so I have no
first-hand knowledge) Verizon recently instituted a policy (at corporate
stores) when you can buy any Verizon phone at the one-year contract price
(not the lower two-year) if you activate it prepaid on the spot. If that's
not a direct subsidy, what is?

> In fact, if it was, a
> competitor could simply buy all the retail assets of a smaller competitor
and
> not activate service and quickly put them out of business.

How? Send a memo and tell every company employee to buy every competitor's
prepaids and bin them? We're talking about major carriers like T-Mo,
Verizon and AT&T. How could one of those guys retailiate on the others in
that fashion?

Due to prepaid subsidies, most, if not all, carriers institute purchase
limits. T-Mo's website only allows two prepaid purchases per person at a
time, and only so many (5 or 10- I forget- I'm only at 3 so far in the last
12 months) to any person/address per year. AT&T also has a yearly limit
(as FatWallet.com customers constantly complain!) WalMart limits prepaid
phone purchases per visit.

If selling these handsets at $15-40 was so lucrative, why would companies
care if I bought 50 and stored them in my garage? Could it be that they'd
actually incur a loss?

> A company can not
> operate under such a business model.

Sure they can, if the abuse is small enough as to not upset the total
profits. How many people are going to buy prepaid handsets and not use them,
or use them on other carriers? How many as a percentage of customers who
activate service "properly?"

Prepaid is an insanely profitable business. As soon as one carrier
discounts handsets to spur adoption rates, the others have tofollow suit to
conpete. It was Tracfone- a company with expensive airtime, that started
the downward spiral. They cripple their phones with custom firmware which
is difficult to "unTracfone" and prevents it's use on other networks. In
fact, Tracfone's biggest problem with retail sales is "accessory theft."
People can buy a complete $15 Motorola phone cheaper than they can buy a
battery or spare charger for the same model! You could buy the phone, take
the battery, and throw the rest away and Be $5 ahead (a replacement battery
for the $15 phone at WalMart is $19.99!)

> What you failed to do was address depreciated inventory along the entire
> supply chain. I illustrated this for the carrier only, but not the
> manufacturer or any other part of the supply chain. Any part of the
supply
> chain will, at some point, find it has significant quantities of
depreciated
> inventory, and it is this that turns into the "free" or very low cost
phones
> used to capture new customers (i.e. buy this phone and get three free) for
> pre and post paid customers. The difference is that the subsidy is part
of
> the business model for post paid, because they have a contract with ETF
> penalties to support it. With pre-paid, they largely rely upon the
inventory
> depreciation [somewhere along the supply chain] to offer low cost phones.

That's true of certain promotional models, perhaps, but it's not the norm-
it doesn't explain how carriers introduce the same NEW model to pre- and
post-paid at the same time- i.e. T-Mo's Nokia 2610, Sidekicks or Samsung
Stripe. The difference is that the prepid models tend to hng around
longer, but that's attributable to the separate packaging- they may guess
how many they need for say, a year, and guess badly. (Carriers don't
repack a retail prepaid phone for postpaid sales or vice-versa, if one
model sells out before the other.)


> In summary, any subsidies on pre-paid contractless phones are almost
certainly
> not the standard business model [especially for GSM based phones and
carriers
> where unlocking a phone is common place]

Manufacturers have taken great pains to make unlocking more difficult these
days- it's often not as simple as getting a code off a web-based calculator
and typing it in. Many phones now require dedicated unlocking hardware or
unlocking by shops that charge a fee often equal or higher than what you
paid for the phone.
I've given plenty of examples that preaid subsidies ARE the standard
business model- look at Virgin's line- a group of unique phones built
specifically for them alone and retail from $14.99 and up. Sorry, but
there is no way in H-E-double-hockey-sticks that any manufacturer on the
planet has figured out how to manufacture a CDMA phone and bundle a battery
and charger to hit a $14.99 RETAIL price point. They can't currently hit
$15 wholesale!


> it exposes a carrier to a lot
> of risk that a phone will be purchased and not used on their plan
(Grandma has
> her E911 backup in her car).

Again, how many? 1 in 20? 1 in 10? The vast bulk of prepaid phones are
used on the intended carrier, which makes up for the losses. The
alternative is to make entry-level prepaid $99.99, which would severely
reduce the market for the lucrative sales of minutes. Again, it's a case
of "giving away the razor" (or, in this case, the RAZR) "to sell the
blades."


You're operating under a flawed principle (IMHO) that carriers and
manufacturers, in thirty years of cellular sales, haven't figured out how
to balance production, inventory, and sales, and glibly accept there will
be thousands of excess phones left over that they'll be thrilled to sell
for 10-cents on the dollar due to 'depreciation.' No one likes
depreciating inventory and certainly doesn't plan an important facet of
their business (like retail prepaid) around it.

Frankly, subsidized prepaid is actually one of the reasons I'm no longer a
cellular dealer. I was an SBMS (eventually Cingular) dealer, and built a
good portion of my business around prepaid- particularly to the elderly,
who often wanted the security of cellular but used very few minutes.
One Christmas season (2001 maybe?) Cingular corporate stores offered a new
Nokia 5120 phone on prepaid, including activation and starter airtime for
the (then) amazing price of $99, and was promoting it heavily. Trouble
was, they wouldn't sell these prepackaged kits to their independent
dealers, in fear that we'd just cannibalize the phones for postpaid sales
(wholesale price at that time for the 5120 was about $125) and $10 airtime
card (wholesale value $8.50.)

At that time I was bundling decent refurbished analog phones ($50-65
wholesale) and $10 airtime and selling them for $99- that couldn't compete
with my own carrier's corporate offering. That was the straw that broke
the proverbial camel's back (but, in fairness, that camel was already
carrying a bunch of straws!) and I terminated my agent agreement.

Subsidized prepaid is a standard practice and has been for a long time.
Obviously the subsidies are far less than with conract phones, but they're
subsidized nonetheless.

In alt.cellular.sprintpcs CozmicDebris <isheforreal> wrote:
>
> Go to any of their investor pages and pull up any one of their quarterly
> reprts that are filed with the SEC. Each and every one will have a line
> item for equipment subsidies.
>

No no. You said they list equipment subsidies as a loss. I said they do not.
They are two distinctly different things. They are expenses, as I said, and
not losses. You don't consider buying food a loss do you? You trade money
for food. A loss is giving something and getting nothing in return.

> It doesn't get any more public than that. And you can argue the semantics
> of the terminology used all you want- that's not going to change the
> reality of the situation.

It is not meerly semantics that I am arguing. You used a well defined word
very much incorrectly and applied it to subsidies. Subsidies are very much
NOT a loss to a carrier.

--
Thomas T. Veldhouse

America is the country where you buy a lifetime
supply of aspirin for one dollar, and use it up in two weeks.

In alt.cellular.sprintpcs Todd Allcock <elecconnec@americaonline.com> wrote:
>
>
> Go to the website of any major carrier, and compare the prices of their
> prepaid phones to the same models unsubsidized without contract. The
> prepaid version is less- usually far less.
>

OK ... Let's use T-Mobile as an example as they are one that does their own
pre and post paid (unlike Verizon or Sprint who use subsideraries and
partners).

Nokia 2610: Pre=$29.99 Post=Free
Motorola V195: Pre=$39.99 Post=19.99
Samsung t219: Pre=$49.99 Post=Free

I just went to the prepaid list and took the first three phones I saw and then
checked the price for post paid customers.

Need I say more?

I will, that means that the subsidy for T-Mobile for these phones is no more
than $50 and yet, the ETF is much higher than that, so they get something
other than a subsidy rebate from the ETF, but that is for another discussion.

> According to posts on Howard Foums (I'm not a Verizon customer so I have no
> first-hand knowledge) Verizon recently instituted a policy (at corporate
> stores) when you can buy any Verizon phone at the one-year contract price
> (not the lower two-year) if you activate it prepaid on the spot. If that's
> not a direct subsidy, what is?
>

Depends upon any terms associated with it, I am not aware of the terms except
one is already obvious, activation. Like I already agreed, I didn't say there
are no subsidies, I said it is not the standard business model, and in
particular, I have mentioned it is not the standard business model for
commitmentless phones. I believe I have been very consistant on that point.

> How? Send a memo and tell every company employee to buy every competitor's
> prepaids and bin them? We're talking about major carriers like T-Mo,
> Verizon and AT&T. How could one of those guys retailiate on the others in
> that fashion?
>

I am strictly speaking in the hypothetical. But yes, you could do significant
damage to a competitor by buying up prepaid assets if that was something they
wanted to do. And, BTW, that kind of bulk does occur. A van was recently
pulled over and seized in Michigan driven by immigrants crammed full of
pre-paid phones. Homeland security got spooked, but it turned out these guys
found it cheaper to buy these phones in Texas and resell them up north at a
profit. It seems that holding onto them for a while would damage the carrier
if they were subsidized, eh?

> Due to prepaid subsidies, most, if not all, carriers institute purchase
> limits. T-Mo's website only allows two prepaid purchases per person at a
> time, and only so many (5 or 10- I forget- I'm only at 3 so far in the last
> 12 months) to any person/address per year. AT&T also has a yearly limit
> (as FatWallet.com customers constantly complain!) WalMart limits prepaid
> phone purchases per visit.
>

Hmm ... see above. I will find the link for the news article.
I don't think this is the same article, or if it is, then my memory mutated
the van into a car, but in event:

http://www.freerepublic.com/focus/f-news/1679939/posts

> If selling these handsets at $15-40 was so lucrative, why would companies
> care if I bought 50 and stored them in my garage? Could it be that they'd
> actually incur a loss?

No, actually, they won't. If the phone was only worth $10 to them in
inventory and you paid $15 for it, then they got to keep the difference and at
least got some profit on their depreciated inventory. The loss is the
depreciation, not the sale to you for $15. In this example, they would
potentially pay taxes on $5 in profit and would write off depreciation losses
whatever they happened to be. They get to write off the depreciation losses
no matter whether you buy the phone or not.

<snip>

I cut all the rest because all the content was supported by your comments
which were refuted above.

--
Thomas T. Veldhouse

America is the country where you buy a lifetime
supply of aspirin for one dollar, and use it up in two weeks.