Legislators love to protect consumers, especially from unpopular and unloved businesses. It is an irony that in many countries the sector that has done so much to revolutionize communication – wireless service providers – has done such a poor job of communicating a positive image. Even in the USA, usually the bastion of the free market, legislators are pushing hard to intervene in the market because of perceived abuses by cellular service providers. Every layer of US government wants to get in on the act: there is a federal “cell empowerment act”, individual states are introducing their own “cell phone user bills of rights”, and the FCC has said it may re-investigate Early Termination Fees (ETFs). But being unloved is not the same as being bad or treating customers unfairly. And choice enables customers to punish poor service. Rightly or wrongly, the cellular service providers keep on selling their services to customers who keep on buying them and only later complain they were not satisfactory. So why do legislators think they need laws to reinforce the role of contracts and competition?
How Much Does It Cost?
Nobody likes to buy something then find out it costs more than expected. Telcos are in the business of making the headline prices of their products look good, whilst making their money elsewhere. This is nothing new in business: many products get sold at a loss on the prospect of making fat profits from associated sales. The solution is also pretty simple. Customers should only agree to tariffs that they understand. Legislation aims to make all prices straightforward so everyone can understand them. But if customers refused to buy into tariffs they did not understand, then legislation would be irrelevant.
Terminating a Contract
The old phrase is that a deal is a deal. ETFs are sometimes treated like they are unfair punishments. That might be true if customers did not know that they signed contracts that lasted for a certain period of time. The fact that they last some time is important – it means that the up-front costs of providing the service can be spread across the duration of a contract. Pretending that there are no up-front costs would be a fiction. Spreading the cost is a kind of financing deal. Customers can avoid the pitfalls of ETFs by picking products that avoid the spread by having higher costs at the beginning, and shorter contractual tie-ins.
Intervention to reduce ETFs may seem like a no-brainer to some people, but most of the proponents have to admit that there is nothing fair about reducing ETFs if that means customers who do not break their contract early end up subsidizing the customers who do. It is not good enough to simply complain that ETFs seem too high. Intervention in prices means doing the maths. Politicians and regulators need to remember they also represent a silent majority of customers who are satisfied with their services, and may be quite happy to agree to contracts with high ETFs if that means the price they pay a significantly lower price that the customers who make work for telcos by repeatedly switching providers.
The uproar about unlocking iPhones shows how sensitive this topic is. Again, the issue is about whether prices are transparent to customers. Locking is key to restricting a customer’s freedom, but is a reasonable exchange for a handset that would otherwise be more expensive. Hook-ups between operators and handset manufacturers are pivotal to keeping costs down and creating a compelling proposition where handsets and networks work properly together. Trying to uncouple the two is perfectly sensible from the customer’s perspective. But if all handsets were sold unlocked, then prices would be higher. The best option for customers is that shop around for a deal they like. If enough customers want unlocked handsets, then somebody will provide them, but at a higher price.
Competition Does Not Work, But Nor Does Intervention
So why do customers regularly feel cheated? Poor service, obstacles and penalties for changing suppliers, broken promises and hidden fees are routine causes of customer dissatisfaction. Regular and constant complaints tells its own story about how pleased customers are with the service they get. When telcos made it hard to complain, or make insufficient effort to listen, that exacerbates the frustration. But part of the problem is really very straightforward – wireless communication is such a compelling sales pitch that many people would buy it regardless of poor quality services and poor treatment by their supplier. Complaining about ETFs and handset locking is like complaining that the original Ford Model T automobile only came in black. Like the first mass-produced automobiles, cellphones have such a dramatic impact on our lifestyle that most inconveniences are pretty trivial compared to the advantages. Which is why people buy them regardless of the poor treatment of each and every supplier. Cellular literally sells itself. Which in turn is why competition is not enough of a spur to improve performance. However, it is specious reasoning to think legislation is the key to better service. More transparent pricing may benefit the unwary customer, but is unlikely to cause telcos to cut prices or lower their expected returns, so transparency is hardly likely to lead to lower bills. Flexibility may be great for customers, but may be less loved if the cost of flexibility is transparent as flexibility adds to costs. Politicians should beware of imposing flexibility and transparent costs whilst simultaneously encouraging other kinds of cross-subsidy in telcos. If some costs are considered to punish customer disloyalty, bear in mind the alternative is to expect loyal customers to pay more. So legislators want to have their cake and eat it: making rules to address what they do not like, but not answerable for how that benefits the customer in the end.
The most effective form of customer protection is customer action. But asking customers to challenge their poor cellphone service would be like asking the first automobile owners not to buy their Model T until Ford offered a range of colors from purple to pink. It sounds like a good idea, but nobody would want to do it in practice. Getting legislators to intervene may seem like the perfect solution, until you realize that somebody will still have to foot the bills, and the providers will still look for a way to turn a profit and get an advantage over their competitors. The biggest failing of most providers is that they make promises they do not keep. Arguably they do that because they have to compete for customers and making promises is their way of attracting customers. By that logic, less competition would make for better services. Meaning the services would be no better, but that the expectations would be set lower. In reality, customers are better off with broken promises and the right to seek redress when contracts are not satisfied. Much better that than vanilla contracts defined by legislators, which promise the minimum and deliver no more. That may avoid disappointment, but will not encourage innovation either. For good reason nobody in government tried to make Ford sell his cars in pink; where the customer cannot exert enough influence, then government intervention will probably flatter to deceive.