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The end of the free cell phone?

U.S. wireless carriers are focusing on getting existing customers to upgrade to new phones and services--and consumers are being asked to absorb more of the handset cost.

Ben Charny Staff Writer, CNET News.com
Ben Charny
covers Net telephony and the cellular industry.
Ben Charny
4 min read
Cell phones are soon going to start costing consumers real money.

For years, American wireless carriers have offered rebates and discounts that often reduced costs so the consumer paid nothing for their phone. Although the subsidies meant less money for the carriers, the companies achieved their objective of signing up more customers. About 40 percent of U.S. residents now own a cell phone.

Now the companies are focusing on getting existing customers to upgrade to new feature-packed phones and services--and consumers are being asked to absorb more of the handset cost.

In the last two weeks, two of the three U.S. wireless carriers have unveiled new phones that will cost from $20 to $200, even after rebates and discounts. Although some no-frills models are available at no cost, customers looking for advanced capabilities will not get a free ride.

While the new phones are better, with color screens and the ability to surf the Internet at dial-up modem speeds, the shift does present some risks. Subscriber growth is already slowing, and it's still an open question whether consumers have an appetite for fancy features--particularly if they must also bear some of the cost of the hardware in addition to higher monthly fees.

"It depends on how good a job the carriers do on educating you, (and) how good a job carriers do to tell you about these new applications like color games and why you should use them," said Alan Reiter, a wireless analyst with consultancy Wireless Internet & Mobile Computing.

Some new phones are equipped with Web browsers that download pictures and graphics onto color screens, for instance. The networks also host more phones at once, meaning fewer blocked or dropped calls.

AT&T Wireless has three new phones, which cost between $80 and $200, and the company is not offering a discount, according to spokesman Ritch Blasi. Cingular Wireless also has three new phones, with the least expensive--an Ericsson T61Z--costing $90 after a $50 rebate. Nextel has cut its rebate to about $50 on all phones, meaning such high-end models as the $250 i90 will cost customers $200.

All these higher-priced phones work only on AT&T Wireless, Cingular and VoiceStream Wireless networks, which use General Packet Radio Service (GPRS) and Global System for Mobile Communications (GSM) standards.

Verizon Wireless and Sprint PCS have built a telephone network using a competing standard known as Code Division Multiple Access (CDMA). Verizon has launched its network and Sprint PCS is expected to turn on its network this summer, but neither company has yet introduced new phones. The companies would not say if their new phones will cost more.

Carriers don't seem to be worried about a potential backlash, even though the phones are debuting at a time when the number of new subscribers is slowing. In some European countries, more than 70 percent of the population has a cell phone, giving carriers fewer new customers to attract. That means most of the business this year will come from existing customers upgrading their phones, Nokia CEO Jorma Ollila told investors Thursday.

"Customers who've been in the marketplace for a number of years, the seasoned veterans, are not interested in the free, very basic phone," said Cingular spokesman Ken Keatley. "They are looking for better phones that can do more things."

Two announcements Thursday provided fresh evidence of a slowdown. Nokia lowered its 2002 cell phone sales forecast to between 400 and 420 million handsets, 20 million fewer than expected. And Cingular said it had added only 234,000 new customers in the first three months of the year, instead of the 450,000 it had predicted.

While the phones cost more because of the increased capability, it's also partly because cell phone companies have long been more interested in getting more customers than in making more money. The cell phone companies have long refused to say how much they pay manufacturers for their cell phones.

"Consumers just don't know how much cell phone companies have eaten on these phones to reduce the barrier to entry," said Nextel Communications spokeswoman Audrey Schaeffer. "It's a significant cost."

A price hike will also put more pressure on companies to honor their warranties should something go wrong. In general, carriers and cell phone makers offer a one- year warranty. Since the phones were free, customers generally dismissed maladies--such as Nokia's notoriously loose phone battery--with a shrug.

But customer expectations about the quality and warranty on the phones may go up if the phones start costing money, analysts suggest. Those leaning toward getting a cell phone as a second telephone line or emergency phone might also think twice about signing up for new service.