ABSTRACT
Cellular telephone service (often called “mobile phone service” or “Handys”) has been a spectacular success. After its invention at Bell Labs, AT&T commissioned McKinsey & Company in 1980 to forecast cell phone penetration in the United States. Their forecast for the year 2000: 900,000 subscribers. The actual šgure was 109 million (and 286 million at the end of 2009 and still counting-with more than 4 billion worldwide). Part of the successful business model has been that the handsets are given to consumers for “free” in exchange for their signing of a long-term contract (usually 2 years). One of the major business decisions that cellular phone service providers must make is how much to subsidize the consumer’s acquisition of the phone and what long-term contract terms to incorporate to recover these costs over time.
