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Cellphone loyalty comes at high cost for consumers

By Damon Darlin
New York Times / June 13, 2010

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Our cellphones have become love objects. We take them everywhere and stare at them constantly. We panic when they are lost and grieve when they die. We even clothe them.

If we covet a new one, well — I’ll stop the analogy here, because economists have a better way to describe the problem: There are switching costs. That’s their term for the barrier that keeps us from blithely embracing a new product.

You would think that there were few barriers to switching cellphones. But the carriers try to make it harder to switch by locking customers into two-year contracts with high early termination fees. And each handset maker also inspires loyalty by continually making improvements in its phones, as Apple announced last week for its iPhone. Some people may complain incessantly about their iPhone and AT&T’s service for it, but not that many are switching. And that’s just the way the companies have intended it.

Some products have low switching costs — a car or canned corn, for instance, because it’s not much bother to replace these products, and the manufacturer takes no extreme measures to keep you loyal.

Choosing a flight should be a simple matter of schedule and cost, but the airlines try to make it harder with their frequent-flier programs. Even your sandwich shop may hand out loyalty cards so your 10th sandwich is free.

There are social switching costs, too. Switching free e-mail services is no small matter because of the bother of informing all your correspondents of your new address. It’s one reason Facebook doesn’t worry too much that you’ll dump it over some privacy imbroglio. You could move to another social network, but would all your friends follow you?

When the switching costs are high, a company that has your loyalty can abuse it by charging more. When switching costs are removed, prices may fall.

The other half of the economic theory, and the reason that economists are still debating the impact of switching costs, is that companies have every incentive to raise prices on the customers they have already captured.

That looks like what AT&T is doing to some of its customers. This month, before the announcement of the new Apple iPhone, it cut the price of its service by half for those who don’t consume much data on their phones. These tend to be the newbies who are just discovering that a phone can be used to search the Web, stream music and videos, and substitute for a computer.

But the battle isn’t really about first adopters choosing between an iPhone or the latest Android phone like Verizon’s Droid Incredible or Sprint’s EVO running on the most advanced cell network.

About 55 million people worldwide use iPhones, an impressive number, to be sure. But billions of feature-phone users who will make the move up to smartphones as the cost of both the phones and the service drops.

Apple needs to stay ahead of Android phones, but an Android phone doesn’t have to be as good as an Apple phone to entice new customers, said Bill Gurley, a Silicon Valley venture capitalist who writes a blog called abovethecrowd. “It only needs to be dramatically better than the current feature phone. Which it is.’’

The perverse lesson from all of this for the consumer? Infidelity often pays off better than blind loyalty.