The Perils Of Subsidized Phones

the-matrix-red-pill-or-blue-pill

What if I told you that from now on, you could only buy a computer from an Internet service provider (ISP), the ISP would give you a huge discount on the price of the computer in exchange for you signing a 2-year contract with them, and the computer would only be able to access the Internet when you connect through them — if your school, favourite coffee shop or friend’s house don’t use the same ISP, then you wouldn’t be able to connect to the Internet from those places. Chances are, you would be outraged. And your outrage would be justified. But that’s basically what happens when you buy a subsidized phone. And it’s doing more harm than good to the market and consumers.

Locked phoneThe most obvious problem with subsidized phones, and by far the most talked-about one, is that it locks your phone to a carrier, preventing you from using it on another carrier’s network. That lock in eliminates the carriers’ need to compete for your business, and you know what happens to prices and service quality when that happens.

 

Another big problem with phone subsidies is that the upfront prices of the subsidized phones are usually below cost, which effectively keeps independent retailers, like Amazon, out of the market — or relegates them to simply reselling carrier device/service packages, or selling to those consumers who are willing to buy unsubsidized phones — since they can’t sell the phones at, or below, cost. In Canada and the US, most people buy subsidized phones, which means much less competition in the retail sale of phones, which almost always results in higher prices and less choice (less phones to choose from). It also effectively puts the carriers in charge of determining the retail price of phones. And who would you rather have setting the retail prices of phones: retailers like Amazon or the carriers ?

Yet another problem with phone subsidies is it reduces phone makers’ incentive for lowering prices. Why would phone makers want to lower their prices when they know people can get a $750 phone for $300 ? Think of the number of iPhone users who can’t afford to buy an iPhone at full price. Now imagine what would happen to Apple if those users switched to a more affordable platform, like BlackBerry10, because carriers weren’t offering subsidies anymore.

Finally, buying a subsidized phone is usually less affordable than buying an unsubsidized phone. Carriers always emphasize how affordable subsidized phones are, but that affordability is a wolf in sheep’s clothing. Many people have crunched the numbers showing how buying subsidized phones is more expensive for consumers in the longer term (1-2 years). BlackBerry recently published their own analysis too. It becomes especially obvious when you consider that several carriers offer discounts on your monthly service rate if you sign up for a service plan without buying a subsidized phone.

Some people will say “Yeah, but I can’t afford to pay the full price of an unsubsidized phone up front.”, which is true for many people. But in that case, you can simply finance the cost of your phone. “Financing ?! No way ! I’m not going into debt for a phone.”. Well, truth be told, when you buy a subsidized phone, you are going into debt to buy the phone. You just don’t realize it because the loan amount is presented as a discount on the price of the phone, and the loan payments are rolled into your monthly service fee so you don’t see them. It’s a hidden loan. Plus, there are financing options available. American consumers are especially fortunate, since AT&T and Verizon offer financing with $0 down payment and 0% interest over 24 months, and they’ll reduce your monthly rate if you do finance your phone with them. And then there’s PayPal Credit, which is available when you buy from ShopBlackBerry. Once more people stop buying subsidized phones and start looking for financing options, you can be sure more businesses will start offering financing options. If there’s a dollar to be made, you can bet there will be people eager to make that dollar.

Unlocked BlackBerry Passport
Unlocked BlackBerry Passport

So with more and more companies offering financing options for phones, and more and more phone makers selling phones directly to consumers, there’s really no reason to buy a subsidized phone, and little reason to buy the phone from a carrier. That’s especially true now that BlackBerry is selling their award-winning phones directly to consumers online in many countries, and with PayPal Credit financing for US customers. Why wait for a carrier to get the best phones on the market, when you can get them directly from BlackBerry or Amazon ?

In the end, you can choose the blue pill, and be locked into a world where you are controlled by the carrier, or you can take the red pill and live freely. The choice is yours.

bartron

I'm programmer with 13 years experience, and a former electronics technician. My first BlackBerry was a Z10, and I'm now rocking a Passport.

  • Bigglybobblyboo

    It’s much worse than this in the UK. Here the culture has always been a ‘free’ phone on a 2 year contract. Only the ‘free’ phone costs you way more than if you had bought one outright. A Z30 from Amazon, for example, bought fully 12 months ago would have saved you over £600 against a ‘free’ one on a 2 year contract from a carrier.

    Or, to put it another way, as soon as I worked that one out our company went SIM free across the board…

    • bartron

      Wow, that’s a lot of money. In Canada, the Big 3 carriers give you a $20/month discount on your service if you sign up with an unsubsidized phone. So you save $480 over two years, which is greater than all the subsidies that the carriers offer. But Canadians don’t crunch the numbers. They just look at the sticker prices.

      In Canada we used to have a healthy market for unsubsidized phones, until smartphones really started to take off. Back then, an expensive phone was $175, but people could still buy it outright. Once expensive phones came out, people started flocking to phone subsidies which killed the market for unsubsidized phones. But the pendulum is starting to swing back towards unsubsidized phones. More and more Canadians are calling for a ban on phone subsidies, and they’re telling the government directly.

  • nnik

    Way too much control is given to those who don’t deserve it. Like you said it limits the consumers choices and handicaps companies.

  • Chaplain_Clancy

    I must admit, I hear the logic, but this is a very NA-centric blog post. For example in Australia we have the Kodos and Kang principle “It’s a two party preferred system…you have to vote for one of us!”

    We have minor carriers who are actually subsets of the three major carriers and thus offer very little incentive to move away from the three major carriers. If phone subsidies in this country were dropped, so would the carrier options. The unfortunate part of the system is that the device is merely a portal to the carrier’s network. Without carriers, you’re relying on wifi, which again leaves you at teh mercy of ISP’s (mostly subsets of carriers).

    I’ve done the numbers for me in Australia and it’s certainly much more affordable to purchase on subsidy. The Passport for example will cost me $300 over 24 months rather than the $800 which they are selling for in this country outright. The monthly payment for the service would have to be paid anyway, so I’m not saving there at all.

  • DLewis13

    I have read similar mentions of the difference between buying your own phone or not. I have checked, on AT&T US, you can save $15.00 a month with a “bring your own phone.” That’s $360.00 over two years, not even counting tax. Unfortunately, I cannot find anything similar on Verizon. So with 4 of 5 phones now out of contract, definitely plan on finding a better deal. I like the idea of buying phones and not being locked into a two year contract.
    Thanks, great post.

    • bartron

      Verizon has their Edge program. Here’s what they say about the advantages of the Edge program:

      With Verizon Edge, you can:

      Enjoy the latest technology available by upgrading your device more frequently
      Upgrade without additional fees or finance charges
      Purchase a new device and pay for it monthly
      Get more with Verizon Edge with The MORE Everything Plan . Customers on The MORE Everything Plan that meet the Gigabyte requirement will receive up to $25 off their monthly line access charges each month.

      • DLewis13

        Very familiar with the EDGE plan on Verizon. Worthless for me, my Z30 is the only smartphone using text and data. Other 4 are basic phones with data blocked on all 4, text blocked on two of them. Nope, EDGE isn’t even close as an option. I came very close to getting a Passport when it had the $200.00 discount, using it on AT&T, leaving the four basic phones on VZW. Then I thought of Lorena Bobbitt. Best to wait for now.

  • ital1

    Great post; thanks for exposing the myth of a subsidized phone.

  • twstd.reality

    I started going unlocked and unsubsidized a couple years ago. One of my better decisions. Another benefit is, you can dump your current carrier without any penalties and jump on promos every couple months if you wanted.

  • Poita316

    Here in The Netherlands it is forbidden by law to lock phones.
    We do get the devices subsidized when getting it with a contract. You can use it with any carrier, but why should you when you have a contract?
    In Begium, subidized phones ar forbidden. So if somebody had a device they paid for it fully. The plans are bought seprate.
    Getting a device on contract is a nicw way to get a device if you dont have a few hundred bucks laying around. But its always cheaper to but the device and a plan on a sim only base (here the prices are bizar for sim only. Saves you 5 a month only).

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