Over the weekend, we were somewhat shocked to learn that Phones 4U, home of mobile phones and semi-trained salesmen on aggressive commissions, is heading down the Blockbuster-Jessops route, and going into administration. Although it might not seem like the greatest of losses (except to purveyors of shiny suits and hair cream), here's why all of phone-buying Britain is going to lose out.
First off, you have to understand the relationship between resellers like Phones 4U and Carphone Warehouse – why did the networks actually bother selling handsets and contracts through a third party? To understand that, it's crucial to realise that the marginal cost to the network of having another customer sign a contract is basically zero. It's much like digital music sales, or software: there's a high initial cost to pay to produce your product – be it a new album, fancy photo-editing software, or a mobile phone network – but once you've built your final product, every paying customer is (almost) pure profit.
This is where Phones 4U come into the picture. The same EE contract will cost you, the consumer, exactly the same amount in a Phones 4U store as an EE store – but the amount of profit that EE gets is substantially less from the P4U contract, since it has to pay them a cut.
However, even that tiny, paltry, reduced profit is still a profit – and substantially better than having that Phones4u customer buy a Vodafone contract instead, from EE's perspective.
As such, for the last two decades, retailers and phone networks have been in an uneasy alliance: the networks know that on the one hand, every sale that goes through Phones 4U or Carphone Warehouse doesn't get them as much money as a sale that walks directly through their doors; on the other hand, some profit is still a profit, and they don't want to gift customers to their competitors by pulling their products from the high street retail stores.
Recently, it would seem, the balance of power has been shifting: Three hasn't sold its contracts through middlemen for a while now; Vodafone pulled out of Phones 4U recently, and now EE followed suit, forcing P4U into administration and, sadly, putting a few thousand employees out of a job.
There are a couple of reasons for this: the mobile market in the UK has become more competitive, with profit margins for mobile networks dwindling; equally importantly, more consumers are buying phones online or direct from manufacturers (like Apple or Sony retail stores), all of which make selling contracts for little profit through Phones 4U an increasingly unappealing prospect for the mobile networks.
Why This is All Bad for You
Aside from the obvious 5,000-odd-jobs-going-down-the-drain negative effect of Phones 4U shuttering, there's another problem for consumers: despite being a middle-man, P4U actually offered some of the cheapest contracts going.
See, unlike the
human drones sales representatives in network shops, who are forced to stick to sales scripts and aren't allowed to negotiate, Phones 4U employees were allowed to play a little more fast-and-loose with negotiating, often able to offer cashback or a discount on the up-front purchase-price of a phone. (One former employee told me that they could discount up to a certain amount depending on the contract, although they lost commission if they discounted – I haven't been able to verify that statement.)
Either way, your options for negotiating a new phone contract have just become dramatically worse. If you're limited to a single network thanks to geography being unkind to you, your best option is now probably a set of crutches and a good sob story.
And it's not just prices: Phones 4U also offered contract buyouts, where they'd help you switch networks or upgrade early, by buying out some or all of your remaining contract when you had six months to go. I'd like to also say that we're losing a source of free and impartial advice between the networks, but well, the last time I was in there a greasy-haired man tried to persuade me that 500 MB of data is all I could ever possibly use, so no.
Ultimately, one less phone retailer on the high street isn't great for consumers, especially in the short run, where you won't be able to use your ruthless bargaining skills to get £50 off a new Galaxy S5 any more. In the long run, we're just going to have to hope that networks will take the increased savings from Phones 4U shutting down, and re-invest it in lower prices or better coverage.