Why Is the Cell Phone Industry So Screwed Up?

by Kelly Kehoe on 1 March 2013 12 comments

Cell phone bills are on the rise. Again. Oh, you broke your phone and didn’t have insurance on it? That’ll be $500+ to replace it. Or you can terminate your contract early. For $175.

What’s wrong with the cell phone industry? Why does it seem that customers are getting the raw end of the deal and nobody is stepping forward to fix it? Why, exactly, is the cell phone industry so screwed up? (See also: Why I Like My Flip Phone)

Fierce Competition?

The Atlantic shows us how profit is shared in the cell phone industry, and why. Apple, of course, enjoys the major share of the profits on the handset side of the business (the company made media headlines in July 2011 for having more available cash than the United States federal government), while other developers are racing to keep up with our smartphone obsession.

As for network providers themselves, there is a little more competition, with Verizon and AT&T at the top and T-Mobile, Sprint, and various prepaid providers on the lower rungs of the ladder. Once AT&T lost its exclusive iPhone offering rights, Verizon made some significant gains, but the power struggle between network providers continues.

Patent Wars?

The Huffington Post has an entire section of their website dedicated to the legal battles between Apple and Samsung, the world's top two smartphone designers and manufacturers.

In August 2012, Apple sued Samsung for $2.5 billion over intellectual property right infringements. The verdict? $1 billion to Apple. And it hasn’t stopped there. Samsung countersued and lost, and now patent litigation is upping the stakes in the cell phone industry.

Innovation seems to be at war with healthy competition; if Apple controls numerous patents in regards to smartphone technologies, how can the others possibly compete without the threat of lawsuits? Some may argue that Samsung has superior technology and platforms via Google’s Android, but with one victory under its belt, lawsuits involving Apple or other cell phone companies are likely to get more frequent and messier from here on out.

Dwindling Profit Margin?

The demand for Apple products never seems to fade, but more and more people are jumping on the alternate smartphone bandwagon these days. While Apple is far from financially insecure, this spike in competition in recent years has forced the company to find ways to keep costs from spiraling beyond what the market deems acceptable (brand name can only get them so far, especially when you could easily buy another smartphone for half the cost of an iPhone).

Partnering with Sprint and Verizon (in addition to AT&T) helped Apple retain its dominance in the realm of cell phone sales (as much as 73% of the market share belongs to Apple), but in a time where disposable incomes are limited and cell phone bills are on the rise, the Apple frenzy has quieted considerably since the development of the first few iPhones.

As for network providers, gone are the days of relying on massive profits from the price-per-text model, as unlimited calling and texting plans are on the rise (despite their ever-increasing cost to the consumer). The industry experimented with unlimited data plans but ultimately found it unsuccessful and phased it out of their menu of services. Apps are also eliminating once-valuable sources of income for these companies, with free calling options from apps like Skype and free texting from a variety of apps like WeChat and What’sApp motivating customers to opt out of pricier calling and texting plans that offer more minutes and more texts.

The solution? Charge consumers more for data and make it harder for them to switch carriers.

Final Word

Fierce competition over pricing structures and patents are complicating matters in the industry, and dwindling profit margins are prompting companies to increase prices for phones and cell service to maintain the same level of growth they experienced the previous decade. Who pays for all this? Consumers do.

What are you doing to defend your wallet form the mobile phone industry's aggressive pricing and marketing?

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Guest's picture
suzemagoo

Any industry where the sales are largely driven by ridiculous claims of new technology being worth exorbitant costs and tons of what really should be illegal interference in what needs to be an open market (if any consumer protection is to prevail) gets screwed up in one big hurry.

This applies equally to the US health care industry, as well as others.

Guest's picture
Michael

Ever notice how a third of the commercials on TV these days are for cell phone companies? Some are clever, some make you laugh, some make you think you'll be getting the best thing ever, but the one thing they all have in common is that they cost a lot of money to air and that money is directly passed on in what consumers pay every month.

Guest's picture
Clint

I do not know if this is just a recycled story, but Android has the majority of market share, and Samsung is the top manufacturer. Apple is at a 36 % at most. Android has over half. (Meaning maybe Americans are not as dumb as the once were)

http://www.forbes.com/sites/chuckjones/2013/02/06/apples-and-androids-us...

Lars Peterson's picture

Clint-

Yes, Android owns a greater share of the market, but that share is spread among several handset manufacturers, Samsung the most profitable.

Apple's iOS is not shared with any other handset manufacturer and so neither is the revenue. Apple also enjoys higher profit margins than its competitors on each device (http://tech.fortune.cnn.com/2010/03/02/what-doth-it-profit-an-iphone/). Taken together -- all iOS revenue, better margins -- mean Apple claims the lion's share of operating profit despite giving up market share to Android.

Guest's picture
Guest

It's brilliant how telecommunication companies have made people believe that a cell phone is an absolute necessity.

Where once a standard $40 monthly bill was the norm, they've convinced people that a $50 bill per person is the new normal, thereby doubling or even tripling the amount of money they pull out of a household.

Guest's picture
Someone's Mom

I am going to use my phone for as long as it works, then I'll see what is available without a data plan and for a reasonable price.

Guest's picture

I was born and raised in a third world country. Back there, there are no charges when you receive call on your cell phone. Verizon charges 45 cents to receive a call. It's monopoly of the worst kind.

Guest's picture
Susan D

I still have my four-year-old clamshell phone. It's prepaid. Except for my phone at work, it's the only phone I have, and it's enough. I don't feel any need to be constantly online. It's certainly cheaper to do so; I bought a years' worth of minutes last April for $100, and I haven't used them all. If I want to use the internet, I'll do so at home.

Guest's picture
Jose

I think what frustrates me the most about the cell phone industry are the service providers themselves. the way the big "V" handles data plans is abusive. You have to pay $30 a month for an amount of data you may never use (although I know of some that routinely go over). I would prefer a reasonable "pay as you go" plan, or at the very least a pro-rated refund of the data that wasn't used, of course, if wishes were horses......

Guest's picture
Paige

Try Ting. They're a fairly new cell phone company that uses the Sprint network. They offer exactly what a lot of reasonable people want--fair prices for a reasonable amount of usage. My husband and I switched over last month and it's cut our cell phone bill in half.

Guest's picture
take_flight

My hubby has a cell phone provided by his company, and I am using up the tail end of my son's old pre-paid that was purchased refurbished from the company, my children have pre-paids that have 300 talk minutes, plus unlimited everything else, (Yes...even data), for $35/month each. I think it's the way to go. Yes there are people where I live that seem to think if you don't have an iphone you're nobody...but I beg to differ. My kids have Samsung Galaxy SII and Samsung Galaxy Reverb for the younger. They really like them and we love our service. Plus we pay a fraction of what our contract friends do a month.

If you can't or don't want to shell out the cash in advance then pre-paid's may not be right for you, but the math has been done on many a personal finance website and the pre-paid's are cheaper over the life of the contract hands down. In the case of iphones, that savings can be upwards of $1000 even with the price of the phone.

Guest's picture

I have had a tumultuous relationship with cell phone providers. I LOVE my smart phone, but I'm working towards financial independence and early retirement, and therefore want to spend as little as possible. For the time being, I'm using Virgin Mobile--they have a $45 plan with 1200 mins, unlimited texting, and unlimited data.