Contract phones first appeared in the United States a long time ago, initially to reduce the cost of purchasing mobile phones and increase user demand.
For a period after the initial invention of mobile phones, U.S. telecommunications operators struggled with a severe shortage of users, leading to significant deficits.
Telecommunications operators couldn't make money simply by building base stations; they needed a sufficient number of mobile phone users to pay them. However, mobile phones were extremely expensive at the time, costing tens of thousands of dollars each, making them unaffordable even for the middle class, and only accessible to the top echelon of the wealthy.
But how many people constituted that top echelon?
Furthermore, telecommunications operators dared not charge these top-tier wealthy individuals excessively high communication fees, as many of them were, in fact, owners of the communication companies themselves.
After much consideration, the only solution was to lower the price of mobile phones, making them accessible to more of the middle class and thereby expanding the user base. This aligned perfectly with the goals of mobile phone manufacturers.
As a result, operators and phone manufacturers decided to collaborate and introduce the contract model. By signing a monthly fixed consumption plan agreement with a telecommunications operator and paying a deposit of around half the phone's price, customers could purchase the phone at a relatively cheaper price and also save significantly on monthly communication fees.
Through this method, the popularization of mobile phones in the United States finally began.
However, this also fostered a habit among many Americans to only buy contract phones. This was because contract phones were cheaper than outright purchases, and they also offered more affordable operator plans, making it a very cost-effective choice and firmly establishing a consumer habit.
This led to the current situation where 90% of mobile phones in the U.S. are contract phones, and it also meant that any company aspiring to enter the mobile phone industry had to partner with at least one telecommunications operator, release a contract phone with that operator, and then enter the U.S. market.
The issue with the Tianxing 5 mobile phone arose precisely here. Because the Tianxing 5 was introduced as a prize in a blind box, and Mr. Huang maintained an attitude of not actively promoting it, allowing it to develop naturally, the Tianxing 5 entered the U.S. market without any partnership agreements with telecommunications operators, thus there was no issue of contract phones.
This was not inherently a problem; at worst, they could be sold as unlocked phones. Users could then sign contracts with their preferred operators themselves to purchase services. The only difference would be the absence of the contract phone discounts.
After all, these were openly stated facts, and no one could stop users from buying them if they were willing.
But the problem now was that the U.S. Telecommunications Association had stepped in, stating that the Tianxing 5 could not operate this way and must sign a partnership agreement with a telecommunications operator to sell contract phones.
This sudden change left Mr. Huang utterly bewildered. He was selling unlocked phones, and the Telecommunications Association wasn't losing anything. Why insist that he enter into a contract phone agreement with a telecommunications operator? It felt more coercive than a forced sale.
Fortunately, Mr. Huang, leveraging his influence in the U.S., quickly uncovered the reason. This was primarily due to an unwritten rule within the U.S. telecommunications industry.
As mentioned before, 90% of mobile phones in the U.S. were contract phones, and the sale price of contract phones was slightly lower than that of regular unlocked phones, which was the main reason for their prevalence.
When contract phones first appeared, the lower prices were jointly borne by the telecommunications operators and the mobile phone manufacturers. For example, a phone originally priced at $10,000 could be obtained by depositing $6,000.
However, the telecommunications operator would have to pay the mobile phone manufacturer $8,000.
In other words, the telecommunications operator had to genuinely disburse $2,000 to the mobile phone developer, while the mobile phone developer also forfeited $2,000 in profit.
The former could recoup this $2,000 through continuous phone usage fees and collect more money later. As for the phone manufacturers, who knew their actual costs? Even with a $2,000 discount, they might still make an additional $2,000. Moreover, with increased sales volume, they generally earned more.
Thus, a mutually beneficial, win-win model was established. However, as time went on, the manufacturing costs of mobile phones decreased, and the profits of mobile phone manufacturers grew.
On the other hand, telecommunications operators felt they were losing out significantly. While the phone developers were merely foregoing some revenue, their profits remained. The operators, however, had to physically pay extra to the phone developers, and as contract phones became more numerous, the amount they had to pay increased.
By 1995, a famous scam, known as the "Sever Fraud," occurred. A businessman named Sever, upon learning about the contract phone system, had a shrewd idea. He established a shell mobile phone company and signed contract agreements with various U.S. telecommunications operators.
Subsequently, instead of manufacturing his own phones, he imported a batch of cheaper, older Nokia models. He then secretly acquired the technology and methods to change the serial numbers on the motherboards.
He sold these phones using the contract phone method, with each phone resulting in an additional $200 payment from the telecommunications operator to him.
The problem was that the phones sold were actually bought back by Sever's own people. These phones were quickly returned to Sever, and after altering the serial numbers on the motherboards through his methods, they were repackaged as brand-new phones and resold through contract agreements.
In this way, each phone could be used to repeatedly earn the $200 subsidy. Sever quickly amassed a fortune.
It wasn't until later, when these operators discovered that the subsequent service fees for Sever's phones were almost zero – meaning, after the first month, there were no new call charges – that they realized they couldn't earn any money from these phones.
Since the U.S. had no national identification system, purchasing a SIM card required no identity verification. Therefore, they couldn't even locate the phone owners.
So, they reported it to the police. However, Sever had already fled, having earned over $1 million in massive profits.
To reduce the chances of being discovered, Sever adopted a scattergun approach, signing contract agreements with almost all telecommunications operators and operating slowly, making the bad debt rate inconspicuous within the overall data. The issue wasn't discovered until over a year later, but by then, all telecommunications operators had been defrauded.
Enraged, these telecommunications operators conferred and felt they were being unfairly disadvantaged. They reasoned that they shouldn't have to subsidize mobile phone manufacturers. Consequently, all telecommunications operators collectively informed all mobile phone manufacturers that they would no longer subsidize the actual costs of contract phones.
In other words, for a phone originally priced at $10,000 sold for $6,000, the entire $4,000 loss had to be borne by the mobile phone manufacturers. They would not provide any further subsidies.
Initially, mobile phone manufacturers naturally refused. However, the telecommunications operators banded together. Any manufacturer that refused would be barred from any contract phone deals with any telecommunications operator.
The mobile phone manufacturers, unwilling to yield to the telecommunications operators, retaliated by introducing a rule: any phone manufacturer that didn't sign contract agreements with a telecommunications operator would have their phones barred from using the network of any communication provider affiliated with any association.
This, in effect, cut off the communication network for the mobile phone manufacturers, rendering the phones useless, turning even major brands like Motorola into scrap metal.
With no alternative, the mobile phone manufacturers conceded and agreed to the telecommunications operators' terms. However, the price difference for contract phones could no longer be a massive 40% discount; it was reduced to a maximum of a 10% discount.
The telecommunications operators agreed to this as well. By this time, the average price of mobile phones had already decreased, and their user numbers had increased, so they no longer needed such steep discounts to attract users.
Did people stop using phones just because there were no discounts?
At this point, the customers who had been passively observing the conflict suddenly realized that while the gods were fighting, it was the ordinary people, the spectators, who were suffering. It was truly a miserable situation.
This battle cemented the partnership model between U.S. telecommunication operators and mobile phone manufacturers. However, it also left a historical legacy: the U.S. Telecommunications Association had not rescinded its previous ban. This meant that the unwritten rule persisted: every mobile phone must sign a contract with at least one telecommunications operator.
Firstly, this was to maintain the association's deterrent power, warning future entrants against challenging the association.
Secondly, and more importantly, there were profits to be made. The association later discovered with surprise that as competition among mobile phone manufacturers intensified, many phone operators were willing to actively offer money to telecommunications operators.
However, this came with conditions: telecommunications operators had to vigorously promote their respective phones, receiving a sales commission for each phone sold.
Due to the inherent advantages of telecommunications operators, when they actively promoted a particular phone, the sales results were far more effective than hiring tens of thousands of salespeople.
Indeed, these mobile phone manufacturers began using telecommunications operators as their salespeople, and the telecommunications operators had no complaints, as they were making money. Being salespeople was not demeaning.
Furthermore, these mobile phone manufacturers could also request telecommunications operators to offer more discounts for their contract phones to attract consumers. The cost for these discounts would be borne by the mobile phone manufacturers themselves.
For telecommunications operators, these were tangible benefits. Many telecommunications operators could no longer make money from their core business and were entirely reliant on the various sales rebates and subsidies provided by mobile phone manufacturers.
Therefore, the Telecommunications Association absolutely could not accept the collapse of the current contract phone system. They would do everything in their power to maintain this system, and any enterprise that dared to challenge it would face their severe repercussions.
And this severe repercussion fell upon the Tianxing 5. The Tianxing 5's audacity in not signing contract agreements with any telecommunications operator was considered an act of extreme defiance, a disruption of industry unwritten rules. Moreover, it was a Chinese brand, so who else would they target if not them?
Thus, very quickly, all new users of the Tianxing 5 mobile phone were astonished to find that their phones had no telecommunications operators to provide communication services. What was the point of having a phone then!