How much does a smartphone cost? For most consumers, the answer is pretty straight forward: $200. If you’re looking for the latest iPhone, Android, BlackBerry, or Windows Phone, chances are the standard price point is $200. A few special phones might cost $250 or $300, and some older and mid-range models might be $100 or $150. But for the most part, you’re going to be right in that $200 price range.
It’s a horribly deceiving number.
You might pay only $200 up front, but the phone actually costs much more than that. Seriously, go to any carrier’s website and look at their phone selections. You’ll see that $200 or whatever price tag in a large font, but if you look closer you’ll see a much larger number in a much smaller font. The retail price of that phone might be $500, or it might be $650. But we never really know that, since we pay only $200 for the phone.
No, the carrier is not some benevolent corporate entity that wants you to pay less for a phone. It is simply running a smart business maneuver. Carriers know you’re going to scoff at paying $500 for a phone, so they charge you only $200. They make up for the difference by requiring you to sign a two-year contract. That guarantees them revenues, which will compensate for the loss.
In other words, your monthly service rate reflects the $300 or $400 or $500 difference between the actual cost of the phone and what you paid for it. Even if you pay full price for the phone and don’t sign a two-year contract, you’re still paying the subsidy rate. Which is why T-Mobile has it right with its model.
T-Mobile no longer offers a subsidy on its phones. If it costs $500, you pay $500. But you’re not paying that $500 when you’re at the checkout. You’ll pay only $100 or $150 there — lower than what you’ll pay at Verizon or AT&T. Then you’ll pay $20 per month for 24 months to pay off the phone. It’s essentially a loan at zero percent APR. That’s tough to beat.
What makes this work is T-Mobile’s pricing. For $60 per month you get unlimited talk and text, plus 2.5GB of data. For unlimited talk and text with 2GB of data on Verizon, you’re paying $100 per month. So even when you add in the $20 monthly handset payment on T-Mobile, you’re still paying $20 less per month for what amounts to more service (.5GB more).
This model clearly makes more sense, especially with the zero percent APR feature. Say you hit a financial rough patch and can’t afford to pay another $200 for a new phone after two years. You stick with your old phone instead. With T-Mobile you’re then paying $60 per month, while with Verizon you’re still paying $100. In other words, with Verizon you’re still paying subsidy pricing even though you’re not actively receiving a subsidy. They can afford to keep this model, because of their size. But it’s certainly not friendly to consumers.
What works further for T-Mobile is the varying monthly payment prices. Some devices cost more than others. The BlackBerry 10 cost is not the same as the Samsung Galaxy cost. Yet when you go to the store they still have the same $200 price tag on them. You’re also charged the same subsidy. T-Mobile makes the differentiation, though. If the phone costs $500, then you’re paying a certain amount down and a certain amount per month, and your total payment will be $500. With Verizon you’re paying a lump sum up front and what amounts to a standard subsidy. In essence, you’re paying the same subsidy as someone with a $650 phone, which hardly seems fair.
T-Mobile certainly has a long way to go as a carrier. It’s been No. 4 for what seems like forever, and with Sprint making a turnaround T-Mobile’s job has gotten even harder. They have, however, taken a step in the right direction with these new plans. They’re consumer friendly, or at least friendlier than those of larger carriers. It might take consumers a while to catch on, but eventually I believe most carriers will go with this model.
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