We've been writing about mobile phone subsidies for quite some time. As you probably know, most of the time (especially in the US) when you buy a mobile phone, it's heavily subsidized by the mobile operator, which is part of the reason why they require a long-term contract with expensive penalties if you break the contract early. Of course, they really make up that "subsidy" by charging higher prices on the service, and they do so over such an extended period of time that the higher service fees almost certainly outweigh the amount of the original subsidy. So, despite it appearing "cheaper" up front to consumers, subsidies are frequently against the consumer's best interest, and somewhat silly. We all buy computers without subsidies from our ISPs. Why shouldn't we do the same with mobile phones?

Even though these subsidy programs really benefit the mobile operators the most, they've been complaining about them for years. It really was almost exactly a decade ago, that we wrote that operators in the US were exploring the idea of ditching subsidies, even as we also discussed how mobile operators didn't seem to realize that those subsidies probably helped the operators more. However, it took until now for one of the major operators to finally make the break. T-Mobile has officially announced the end of phone subsidies. The T-Mobile plan is actually pretty smart and consumer friendly. You'll pay $99 upfront, and then effectively "finance" the rest of the phone purchase with $15 or $20 payments added to each monthly phone bill -- but those payments go away once the phone is paid off. And, yes, the fees for ongoing service are cheaper. So, as long as you keep your phone past the time when you pay it off, you're likely to save money.

As some are pointing out, this actually could save consumers are fair bit of money and allow them to avoid a lot of hassle later. That's because without subsidies, the reasons for super long term contracts become less important. That also means operators have less reason to focus on "locked" phones, and can be much more open to allowing unlocked phones on their network.

And... at the same time, the massive growth of the smartphone market worldwide, might even mean that you don't even need to pay more for your smartphone. Jimmy Wales recently noted that his smartphone of choice was a cheap Android-powered smartphone, made by Huawei in China and sold in Kenya for $50. As we're now reaching massive economies of scale for smartphones, and as Moore's law churns along, the phones themselves can get cheaper and cheaper -- as we've seen with lots of other technology, including computers.

As such, it's not hard to see this working out spectacularly for consumers, where both the phones and the service can end up being cheaper, without the annoying lock-in and lock-down with subsidized phones. Hopefully other US operators will start to follow suit as well. They've only talked about it for a decade. And with T-Mobile leading the way, perhaps others will finally take the plunge.

You probably noticed that Apple announced the latest incarnation of the iPhone, the 3GS, earlier this week. It features mostly incremental upgrades over the existing model's features, alongside software enhancements that will work on earlier models, but it's still creating a lot of demand from existing iPhone 3G owners who want to upgrade. One speed bump, though: like any other handset it subsidizes, AT&T is only offering the lowest price for the new device to new customers, or people who are in the last six months of their contract. Since the iPhone 3G came out less than a year ago, that means users of the latest iPhone that want to upgrade will have to pay an extra $200. Which, of course, is making some of them unhappy. The iPhone's upfront price benefits from a hefty subsidy, like other devices AT&T sells, so the operator's going to treat its subsidy, and how it recovers it, pretty much like any other device. It may come as a shock to some iPhone users, but the device really is just another phone in the eyes of operators, and won't get them any special treatment. Another piece of evidence: the fact that some of the new features in the iPhone 3.0 software that Apple touted -- such as support for faster HSDPA data networks, MMS, and data tethering -- aren't yet available on AT&T, because the operator isn't supporting them (or hasn't figured out how to bill for them). That's more like the mobile world we're used to: innovation and new features from handset vendors making it to customers only with the approval of operators.

Mobile operators are increasingly looking to sell non-phone devices like laptops and netbooks with embedded or add-on wireless modems as a way to boost their subscriber figures and generate extra income. Typically, consumers buy the device at a discounted upfront cost, then get tied in to a long-term contract for monthly data service (2 years at $60 per month seems to be the norm in the US). If users quit paying their bills, in theory, they've gotten a laptop on the cheap, though of course they're still subject to the terms of the contract, and damage to their credit, and so on. But Ericsson, which makes a lot of the embedded modems, has announced some new technology it's calling a "kill pill" that allows mobile operators to remotely lock a laptop by sending a signal to it over their network. The company says it's ideal if a data user quits paying their bills, but it's not hard to imagine mobile operators coming up with more nefarious uses for the device -- like shutting a machine down if a user closes their account, even if they've fulfilled their contract.

We've wondered before why mobile operators say they hate the subsidies they pay to discount handset prices, but then expand their use of them to include laptops and netbooks. The trend looks like it's here to stay, as Verizon Wireless has now confirmed it will start selling 3G-equipped netbooks by the end of June, so now, in addition to tying yourself into a 2-year contract where you're paying back the cost of your cell phone, you'll soon be able to tie yourself into a long-term data-service contract to pay back the price of a laptop, too. Of course, once that contract's up, the device will still be locked to the operator from which you bought it, making it difficult (or impossible) to take your business elsewhere. Meanwhile, business is flowing the other direction, too: Dell is reportedly looking to set up a virtual operator in Japan, selling its customers network access on another operator's mobile network to use with their mobile-equipped laptops. It's an interesting contrast in models, because it's unlikely Dell will subsidize the hardware like the operators. Part of the issue with handset subsidies is that consumers are used to paying the lower subsidized prices, and so any change that raises prices will be met with disdain. But people aren't used to the benefit of subsidies for their PCs, so may be more open to paying a higher upfront cost for the hardware if it means they don't have to sign a long-term contract with a high monthly service charge.

There's been a constant clamor over the past few years from some consumer groups that want to see mobile operators forced to stop locking handsets they sell, so that phones will be able to work with any compatible operator. The argument is that locking handsets to operators diminishes the competition among the operators, particularly when operators compete by getting exclusive deals on particular devices (such as the iPhone, which is locked to AT&T). But it's always seemed that the groups are looking to have their cake and eat it too: the locked devices and contracts operators use allow them to recover the subsidies they spend to drop the upfront costs of handsets. So if the groups want to do away with locks and other techniques that support the subsidies, that's fine, as long as they're also willing to accept higher device costs. But somehow, that part always gets left out, just as it has in stories covering the latest push by the groups (via MocoNews) and some smaller operators to get the government to outlaw handset exclusives. If these groups want to eliminate cheap handsets for consumers, they need to explain that -- or explain exactly how these regulations they want won't serve to lower service prices, but offset that with much higher device prices.

A few years back, after noting the trend of laptop companies to start building in cellular data modems into their laptops, we wondered when it would reach the stage where mobile operators would subsidize the cost of a laptop, just as they subsidize the cost of mobile phones in many cases. In early 2006, we started to see such subsidized laptops go on sale in Europe, with the mobile operators selling the laptops directly for well below list price, as long as you bought into a long term data plan. The whole idea seemed a bit strange, as mobile operators have long ranted long and hard about how much they hate, hate, hate subsidies, and how they wish they could do away with them. So, why add them to laptops?

However, the idea has now traveled over to the US as well, in a deal between Acer, Radio Shack and AT&T allowing people to buy an Acer netbook for just $100, so long as they agree to a 2 year $60/month contract for an AT&T mobile data plan. It's still a little confusing as to why the mobile operators are agreeing to this, following so many vehement arguments against mobile phone subsidies, but perhaps they're finally realizing that those subsidies aren't such a bad thing when they get people using their services. Still, how long will it be until buyers start complaining about early termination fees for laptops like they do for mobile phones?

You know that awful feeling you get when your mobile operator tells you there's a huge "early termination fee" for canceling your contract early? Yeah, that's probably about how Sprint executives feel now that Sprint may need to pay $73 million for its ETFs. A closer look at the details shows that it really would just be refunding $18.25 million and then reversing charges on another $54.75 million in ETFs that hadn't been paid. People absolutely hate ETFs, and even Sprint acknowledged this last year when it noted that its eventual WiMAX network won't have ETFs.

However, there is a reason why such ETFs exist: it's basically to recoup the subsidy that mobile operators pay to give you your super cheap mobile phones. And, those ETFs were in the contracts offered to customers, so it's difficult to see why such things are really a problem. The actual ruling sheds some light on this, as it notes that in 80% of the ETFs, it was actually Sprint terminating the contract and then still charging the ETF -- which, as the ruling points out, is basically Sprint trying to get "liquidated damages." Then, the problem is that it does so in violation of a specific California law that requires a more accurate calculation of liquidated damages, beyond "the ETF is $200 no matter what." So, this isn't the end of ETFs by any means, but might mean that they need to be a bit more fair going forward.

As was widely expected, it turns out that all the hype and fuss about the iPhone costing $199 was really hiding the key facts: it's only that price if you're buying it in the US, along with a long term contract with high service fees. At first it actually appeared as though the only possible way you could buy the phone was with one of those contracts. However, AT&T has now admitted that it will indeed sell the phone without a contract, but the price will be $599. While some unlockers may find that worthwhile, it's probably a bit much for most. Still, this once again highlights how Apple's predictions that it was going to change the economics of the mobile phone industry haven't actually been true. There are plenty of mobile phones out there that you can buy subsidized under a contract, which cost 3x as much without a contract. So, rather than changing the economics of mobile phones, Apple has now completely bought into them. Update: Of course, as some are realizing it's actually cheaper to buy the subsidized version and break the contract. The early termination fee is less than the difference here, so you end up doing better that way.

When we wrote about the iPhone pricing immediately after the Steve Jobs keynote, it wasn't entirely clear what the details were, and if AT&T/Apple had shifted to a typical carrier-subsidized model. However, the details quickly became clear. Indeed, Apple and AT&T ditched the deal they had last year, whereby Apple actually received a cut of AT&T's service fees. Instead, AT&T is buying the devices directly from Apple and then selling them (at a loss) to customers who will need to sign up for a more expensive service and a two-year contract (rather than the old one-year contract). Basically, this is back to the traditional model of mobile phone sales -- which Apple had suggested was a thing of a past just a year ago.

Either way, though, the deal works out fine for Apple. It still gets the full price it needs to get on the iPhones and doesn't have to worry about recouping service fees from folks who unlock iPhones. AT&T, on the other hand, now becomes a lot more reliant on service fees, first to make up for the loss on the device sale, and then to show growth in its 3G network usage. To that end, it appears that AT&T has totally ditched the old model where you could buy an iPhone and "activate" it on your own. No more. Now you have to both buy and activate the phone in stores. You can't order the phones online and have them delivered to be self-activated. In Engadget's post, the writer seems confused by this, and quotes AT&T's bogus claim that it did away with self-activation because the company "found that many others wanted to complete purchase and activation in one step so they could walk out of the AT&T store with their iPhone up and running." If that were the case, they could have just added in-store activation, without removing the option for self-activation.

The real reason seems pretty obvious: if you have to both buy and activate the phones at the same time and they require a two year contract, it's a lot trickier to get your hands on an iPhone for unlocking purposes. Since the full process is supposed to happen at once, it seems unlikely that stores will be letting people walk out the door with an iPhone that doesn't also have a contract. Those hundreds of thousands of unactivated iPhones that disappeared into China? Not so easy this time around (of course, you'll also note that the new iPhone will be available in 70 countries, so they're trying to stamp out the issue from the supply side too). Yes, there will still be 3G iPhones out there that can be unlocked, but that market is going to dry up significantly and cost a lot more.