Locked handsets come down to economics

Telecom New Zealand has been threatened with action following its plans to go down the "locked" mobile phone route with its new "Skinny" brand aimed at "youth" and the prepay market.

The Telecom Users Association of New Zealand has complained to the Commerce Commission, branding this "uncompetitive", since it hinders users moving between different providers.

I agree with its chief executive Paul Brislen on the matter of competition, adding that "locked" mobile phones are evil and often useless things, having owned a few myself. Sometimes you find yourself with a redundant phone, which may cost more to unlock than it does to actually buy a new one!

But the issue is, if Telecom is subsidising the price of Skinny mobile phones, then isn't it entitled to recoup this subsidy? One of the oldest rules of economics is that "there is no such thing as a free lunch".

Similarly, Skinny handsets will have to be paid for somehow, such as in the cost of calls.

Thus, if Telecom sells "cheap" handsets under the Skinny label, naturally it will recover the money in calling charges, unless it aims to hook-in customers for the longer term, a bit like how banks offer special deals to students, and then make their money from the customer.

Now, you may recall last year I commented on the availability of 99p mobile phones in the UK. At one time, such phones had even cost as little as a penny.

Of course, no mobile phone company can even make a phone for 99p, never mind a penny. There has to be a subsidy somewhere, and this would explain why the price of the phone might vary in the UK depending on the network used for the top-up you have to buy. Virgin Mobile and the 3 Network tended to be cheapest, certainly cheaper typically than say Vodafone. Obviously, the idea is to recover the subsidy in calling charges, but I'm sure this doesn't always happen.

I often went to Carphone Warehouse last year and bought phones for a few pounds before posting them to New Zealand, where handsets are typically dearer.

And other people must have got the same idea, as I note that this Christmas, the 99p mobile phones are £4.50.

The issue for handset suppliers and telcos is as follows: how best do they make their money? Is it on the handset or is it on the cost of a call? And how best might suppliers and telcos work together to achieve this?

TUANZ is right to raise the issue of the "uncompetitive" nature of locked mobile phones, but surely it must understand the economics and reasoning of Telecom NZ?

As long as Skinny customers are aware of the cost of their initial subsidy, like mobile users seem aware when they buy fixed-length contracts with their supposed "free" phones, then Skinny customers must accept the cost of a "locked" mobile phone and being "trapped" with Telecom and its potentially higher calling charges over the longer term.