There are a some ideas that are useful when thinking about markets. People act rationally; they act in their own best interests; they follow incentives; their preferences are revealed by their actions; and so on. This leads to such things as arbitrage, which the rationalist Harry Potter has figured out.
So not only is the wizarding economy almost completely decoupled from the Muggle economy, no one here has ever heard of arbitrage. The larger Muggle economy had a fluctuating trading range of gold to silver, so every time the Muggle gold-to-silver ratio got more than 5% away from the weight of seventeen Sickles to one Galleon, either gold or silver should have drained from the wizarding economy until it became impossible to maintain the exchange rate. Bring in a ton of silver, change to Sickles (and pay 5%), change the Sickles for Galleons, take the gold to the Muggle world, exchange it for more silver than you started with, and repeat.
Today I ordered a new HTC One S for my wife. For £15.50 per month over two years we get the handset for “free”, and various voice, SMS and data services. That means that we pay £372. But by buying via a cashback site site such as Quidco we get £30 back — this is commission that would otherwise have gone to some middleman. So we are paying £342 for the handset and the service.
The cheapest I can find the handset online on its own is £350; more typically it costs £400. For equivalent voice, SMS and data services I would pay at least £8.50 per month.
Arbitrage does seem to be happening. On eBay there are people selling phones that have been removed from their original packaging to be unlocked. Someone has taken out a contract with free handset and is then selling the handset without the service for more than they paid for the handset plus the service.
There are other oddities. My wife is an Orange customer. The deal we wanted is available on both T-Mobile and Orange, in both cases only to new customers. One can not simply arrange a new deal with one’s existing supplier because then it is impossible to keep the same phone number. One can “upgrade”, but by doing this the best deals are not available. The only rational thing for a customer to do is switch network operators every two years. My wife switched to T-Mobile. If she had been a T-Mobile customer she would have switched to Orange; nothing else would be any different.
The only way that this makes sense is if most customers do not understand it. The strategy must be to lure new customers with cheap deals and then charge them ever more by confusing them into staying loyal. And it must work, because otherwise this state of affairs would not be stable. People act rationally all right, but they are often acting on limited information.
The rather obvious lesson is that it pays to have more knowledge than the next man.
Incidentally, while it is not strictly relevant because my story could be true of any network operators in the UK, both Orange and T-Mobile are owned by the same parent company, EverythingEverywhere.
Working in a call centre and having the brain of a gamer, I can tell you that there’s at least eight million ways to game the system of most big companies if you know which buttons to press. It’s kind of insane, actually.
A bad warning sign: Everything Everywhere is owned (via various holding companies and intermediaries) mostly by the French and German governments.
The mobile phone business in the UK is so much a product of incoherent regulation (that comes from so many places) and so much a product of large, stupid organisations and the incentives are so warped that the levels of gaming the system that are achievable are truly awesome, however. I have had one or two situations in which the network has paid me to have a phone rather than the other way round.
The flipside of the bizarre incentives that exist in the mobile industry, is that questions of what is sensible business practice, what is good customer service, and what is ethical also go by the wayside. While you can game the mobile networks, they will also game you – for instance by charging you 1000 times as much when you roam abroad as when you are at home, leading to huge bills if you forget to turn the data off before getting on a plane. And some of the consequences of the weird incentives resemble accounting fraud. Whether this is deliberate is impossible to determine by me, and no doubt equally impossible by accountants.
>And it must work, because otherwise this state of
>affairs would not be stable.
It’s only stable because of regulatory capture, basically. The regulators (British, European, and worldwide, some of which refer to themselves as “Standards Organisations” rather than regulators) and the governments that created them have become convinced that the stability of the system is important, and act to protect it. One day they whole thing will collapse all at once.
One final thing:
Arbitrage does seem to be happening. On eBay there are people selling phones that have been removed from their original packaging to be unlocked. Someone has taken out a contract with free handset and is then selling the handset without the service for more than they paid for the handset plus the service.
The mobile phone industry actually has an expression: “Box breaking”. This means obtaining a phone and a service plan that are sold together and reselling them separately. If the phone is locked to only work on one network, then the box breaker normally unlocks the phone at some point so that it will work on any network.
Historically, mobile phone networks would sell phones aimed at the pre-pay (PAYG) market at less than the manufacturers cost of the phone. The phone would come with a SIM, and the expectation is that the network would make the cost of the phone back in inflated call costs later. If the phone was ever actually used with the SIM in question, this would happen, but there was no obligation for the SIM to ever be used in this way. Box-breakers would buy phones from retail stores in large numbers, unlock them, and then export them, often to Africa. Mobile phone operators hated, hated, hated this, but it was and remains perfectly legal. (This is why you may be required to buy £10 or £20 worth of airtime when you buy a pre-pay mobile phone, or why there are restrictions on how many phones you can buy at a time or whether you can pay cash).
(A little question here is “Why are phones so easy for box-breakers to unlock”? The answer is partly the ingenuity of the box-breakers and the people who provide services to them, but partly also the different incentives of the people who manufacture the phones and the people who sell them (the networks). The manufacturers don’t care if the box-breaking subsequently occurs, as long as the phone is bought by someone. In some instances they prefer it. If a phone is sold to Africa through an unauthorised distributor, then a distribution network for Africa has been set up, in places where setting up an official one can be difficult. For one thing, they don’t have to provide after sales service, which is a state of affairs that they probably prefer).
Box-breaking for contract phones is less of an issue for operators, because they do have a guarantee of two years of cash flow from you. There is an excellent chance that you will accidentally forget to turn off data roaming when abroad or something, or perhaps you will forget to change networks for a few months at the end of the contract and pay that monthly fee for a bit longer than intended. Professional box-breakers don’t really target contract phones due to the fact that one must provide ID and endure a credit check (which means the networks will not let you do it for hundreds or thousands of phones, and if you do the tax authorities will likely find out) and because the whole process takes the two year length of a phone contract. The people who do this are regular people doing what Rob is describing – making a little cash on the side and trying to pay as little as possible for their mobile phone services, and also doing their best to game the system because it is fun. The expression the mobile phone industry uses for these people is “deal-seekers”.
To understand how mobile operators feel about these people, imagine the way that casino managers utter the expression “card counters”, and instead replace it with the words “deal-seekers” or (much worse) “box-breakers”. In both cases, the level of loathing is intense, mixed with a sense that the practice that they despise is dishonest and must be stamped out. There way of thinking has been so entirely co-opted by the workings of the industry that they operate in that they find it difficult to see that the problems are with the workings of their industry and that the practices they oppose are in fact entirely honest and above board.
The tactics used by the mobile industry are then very similar to those used by the casino industry to wipe out card counting. Firstly, you lobby governments to make the practice illegal. (Governments in developed countries have a good record of resisting this. Box breaking is entirely legal in Europe and although a literal reading of the DMCA makes it illegal in the US, a fair use exemption has been found to overrule this). Then, if you can’t do that, you smear the people who are doing it, possibly by blurring the distinction between legal practices and illegal practices. (The mobile industry likes to deliberately confuse the practice of unlocking a phone so it will operate on any network – entirely legal – with the practice of changing the IMEI (ie serial number) of a phone so that stolen phones can continue to be used after being blacklisted – very illegal, and rightly so). In middle income countries where the rule of law is weaker, other stuff happens. The comparisons between the ethics of the mobile phone business and the ethics of the casino business continue to work surprisingly well.
In really poor countries (oddly enough) things work much better. Nobody would ever think of selling phones and SIMs or airtime together – they are sold separately. Markets are much more transparent. Stuff usually just works. This is maybe why growth has been so fast in such places.
£452 vs £342, saving £110. If you spent more than a day investigating this and setting it up you are probably losing money, even assuming you are on a modest salary.
It’s one of those inefficiencies that persists at the margin because it doesn’t matter too much. Of course the alternative – a monopoly phone company run by politicians – would be even less efficient in other ways.
‘The only rational thing for a customer to do is switch network operators every two years’
It works the same way ‘over here for both cell phones and ‘cable / dish / whatever television !!
Interestingly enough the ‘dish television providers’ operate exactly the same way. The so-called promotional offers are only offered to ‘new’ customers.
No matter how much you try to reason with them, they simply WILL NOT make the same offer to existing customers and the impression they give is that they really don’t give a rat’s behind if you drop their service or not !!
Maybe they are, in the end owned by the same company so they don’t have to care !!!
In any case, for television, I finally dropped my ‘provider’ ( $80 a moth to watch television ?? You’re joking, right ? There isn’t anything on worth $8 a month, let alone $80 ) built a mission specific PC and between that, ROKU and Netflix can get just about anything I want !!
There used to be much better new-customer deals availabale, but as more people became aware then the operators switched to 18 month then 24 month contracts as a result.
In the past you could get cashback from quidco, and then cashback by rebate. I went about five years and paid basically a net zero for my mobiles/bills 🙂
Andrew: Several big retailers offering cashback deals did go bust four or five years back. Their business model was based on the idea that a large portion of customers would not ultimately go through the hassle of sending in bills etc to claim their rebates and would ultimately end up paying more than they had intended when taking out the contract. However, in about 2007-8, the percentage of people claiming went up (probably because people in general were more stretched for cash) and the other creditors of such businesses called in their loans. I think it was more a consequence of the general economic situation than what people were aware of.
That said, you can still pay absolutely nothing over the life of the contract if you are willing to use a fairly basic phone and spend most of your time making voice calls and sending SMS messages. If you want a decent data allowance and a fancy smartphone, then yes, you are going to have to pay something. Customers want fancy smartphones, which are more expensive, and they want larger data allowances, which put more pressure on networks. People want more, and it is costing more. Some of this is a change in behaviour, and some of this is mobile phone companies, mobile phone retailers etc becoming more aware of their costs.
Hey, Michael, do tell how to get a basic phone for zero.
Basic is all I do.
And zero sounds just fine.
Standard mobile phone contracts in the UK have gone from 12 to 18 to 24 months.
I have long wondered why car insurance hasn’t gone the same way, some obscure regulation probably.
JohnB:
– Go to a deal like this one. Choose the offer that gives “24 months free by redemption”. (You can find other similar offers, many with more minutes. This is just an example).
– Take out the deal. A credit check is necessary, so if you have bad credit, you may not be able to do this.
– Cancel all the extra recurring items (insurance etc) that have been added to the deal without your asking. The simplest way of doing this is just to cancel the direct debits.
– Use the phone, and pay the bills. Send the requested bills to the retailer at certain times. The retailer will then pay the entire amount of money you have paid the phone company back to you. Make sure you do not exceed your monthly minutes, use excessive roaming charges etc, as this *will* cost you.
– One month before the end of the contract, give the mobile phone network notice of cancellation, or (better) ask for a PAC code to port your number to a different network.
– Precisely at the end of the contract, use the PAC to port your number to another network, ideally with another free phone cashback offer like this one.
This requires a certain amount of discipline, but there is no catch to this. Do it as described and your mobile phone will cost nothing whatsoever. If you use quidco to gain more cashback at the first step, having a mobile phone might even cost you a negative amount (ie you receive more money than you pay).
As to why the mobile networks and their dealer networks do this, there are various reasons, of varying levels of absurdity. The sanest on their part is that most customers are not disciplined enough, and end up paying for insurance that is of no value to them, or pay for extra services, or keep the phone for longer than the minimum period. When you do this, your payments to them continue, but theirs to you stop. Another thing to observe is that *revenues* have often been a key metric in the valuation of mobile phone stocks. The money you pay counts as “Revenues” (even better, “Sales”, a recurring item, whereas the money they pay to you (via a roundabout route) counts as “Customer acquisition costs”, a non-recurring item, which makes their accounts look better if you are not looking at them carefully enough.
As Andrew said. the offers of this kind available now are not as good as they were a few years back. In addition, the number of things you have to remember and the amount of effort you need to go to to get your money back is such that it may not be worth the effort. I do not generally recommend such deals to other people for these reasons, although I do use them myself. If you are the sort of person who likes using offers like this and can take advantage of them, you probably know it already.
What I would recommend is either (a) doing what Rob described in the article and switching to the best “New customers only” deal you can find when you get to the end of your contract or (b) Calling your existing network at the end of your contract, asking for a PAC code (to switch your number to a different network) and seeing how big a discount the “customer retentions” department will offer you to not switch networks. Neither of these things will get you a completely free deal, but doing either of them will get you a much better deal then just walking into a high street mobile phone store and taking what they offer you.
mdc wrote:
I take the general point but in this case it didn’t take that long. It helps that there are price comparison sites and Michael Jenningses to help. Also in this domain I find it interesting and fun, the time spent isn’t entirely a cost.
“I have long wondered why car insurance hasn’t gone the same way, some obscure regulation probably.”
Insurers like short policy periods. In many states in the US, it’s far easier to let someone’s policy expire than it is to cancel someone’s coverage.
“Consumer protection” laws have made the expulsion of the problem policyholder (i.e., slow or missing payment of premiums, frequent claims, fraud, etc.) into an expensive obstacle course. Far easier to merely refuse to renew when the policy ends.
They’d sell monthly policies if they were allowed to.
There are actually plenty of 12 month mobile phone contracts still out there. However, they either come without a new phone or with a very low end one. If you want a fancy new smartphone and pay nothing upfront, you usually have to commit to two years. This is because the payments on a mobile phone contract in reality consist of a mixture of time payments on the phone itself and the payment for the service. Phones in recent years have got fancier and more expensive, but at the same time average monthly payments have fallen. The time to pay off a new phone has therefore got longer.
There are also plenty of one month contracts out there if you do not want a new phone, but these are usually more expensive than the 12 month deals. For a line rental only situation, 12 months seems to be the sweet spot. Presumably this is long enough for the network to have paid off their customer acquisition costs, billing setup costs etc and make some money, but about as long as they want to commit themselves to the customer for. Certainly that is consistent with every other product I buy on a fixed term contract (insurance, broadband, etc) working on twelve month contracts.
I think though that although bobby b’s observation about businesses wanting to be able to drop customers is true, it is less important than businesses wanting to be able to vary the price. Sign a fixed term contract with a customer and you then have limited if any flexibility in what you can charge them for the length of that contract. You don’t know what market conditions and price levels will be like in three years, and fixing prices that far out is therefore risky.
Contract deals have made it very easy for common people to have latest smartphones in very affordable plans.
Thanks Michael.
It will take me a little while to get my head around all this.
At the moment I just have two simple pay-as-you-goes.
But all this convoluted games playing is an interesting insight into the nonsense of an artificially regulated economy.
It would seem entirely appropriate that it is taken for all that one can get.
Surely there’s an app for that?
Distended gross profits, sharp practice and fraud characterise the telecoms business. Yeah, they make a few mistakes but handsets are a sideshow and have been the subject of abuse by the operators themselves – ordering tens of thousands of handsets with identical IMEIs for instance.
The not often told story of why AT&T in the USA was chopped to (Baby Bell) pieces bears re-telling – they were fraudulently billing the US Government and refused to desist even when found out – such was their arrogance.
I have been involved with billing forensics over the years and can tell you that speculative billing is endemic and the formulas are identifiable as applied in the billing software.
Sure, mistakes are made by marketing twerps over handset deals – but do not, for a moment believe that this extends to airtime/minutes – the percentages for the likelihood of investigation vs. bill size and amount of speculative excess to add are well known and “they” are well and truly “at it” on an epic scale.
Try reconciling your PAYG funds against calls….
“$80 a moth to watch television ??”
I believe thats what they refer to as “Old media”, even my dad got rid of Sky after I showed him how to stream the football
http://encyclopediadramatica.se/Old_media
“it pays to have more knowledge than the next man”
It also pays not to care too much about gadget status.
I have a Sony K850 which must by now be about eight years old.
It works perfectly well and has a wonderfully intuitive menu system – whatever you need to do, is exactly where you’d expect to find it, and never more than about two clicks away.
£9.99 a month with what is – to me – an unlimited use package, ie I never ever exceed the limits.
I suppose this means I am somehow paying too much, and could get the latest whizzbang incomprehensible handheld computer with a squillion features nobody needs and with the ones you do need hard to find and slow to operate, for only about two or three times what I pay now.
Well thanks but no thanks; I have more important things to do.
Andrew Duffin wrote:
‘Well thanks but no thanks; I have more important things to do.’
It’s a source of never-ending joy to me to watch my BIL have a 3-minute conversation with Siri (sp?) to try and dial a telephone number. He actually argues with her. The not-so-funny part is that this is a response to hands-free driving laws, but I contend that these extended adversarial conversations with a non-existent entity are actually more distracting. Dialling a phone is simple – arguing with a dumb electronic pseudo-persona is hard.
Second-funniest is when he dictates an e-mail, while simulataneously watching the text appearing on the screen and spell-checking it with the keyboard.
I want my next cell-phobne to have a rotary dial. It will be 100% fraud-proof. Nobody will know how to use it, and most people will talk at it and wonder why it doesn’t respond.
llater,
llamas