Why You Shouldn’t Buy a Subsidised Phone

The news that T-Mobile will be ending mobile phone subsidies from 2013 onwards is good news for consumers. Under the new system T-Mobile will offer sim-only plans which can be used with any phone, allowing them to shop around the market more effectively for good deals on handsets. It is important to remember that, in most cases, a phone ‘subsidy’ is nothing of the sort. While the initial cash outlay is substantially lower on a subsidised phone, it is essentially mortgaged over the length of the contract. The main problem with this approach is that it makes it extremely difficult for the consumer to work out what they are actually paying for, as the proportion of the monthly charge that goes towards phone repayment is concealed. This is especially true in the US, where even a close examination of the Verizon website makes it almost impossible to work out the ratio between the cost of carrier services and phone repayment. T-Mobile’s announcement is a victory for transparency, and from a consumer perspective all information is good information.

It is, however, possible to show how much consumers pay for their phones over the duration of their contract in the UK market. This is done by comparing the cost of sim-only plans that have the same text, call and data allowance as plans that come tied to a subsidised phone. The results support the idea that the increased fragmentation of the smart phone market will lead to better deals for consumers because of increased manufacturer competition. We compared three near-identical sets of plans over a 24-month duration (the standard length of a Vodafone contract), factoring in the initial cost of buying the handset as cheaply as possible from an independent retailer at the start of sim-only plan.

Firstly we looked at Vodafone’s most comprehensive iPhone 4s contract, which gives the customer the phone free up front with a £42 p/m payment over two years. This contract gave unlimited minutes, unlimited texts and 2GB of data (with 2GB of Bt Hotspot wireless). The sim-only equivalent was £26 p/m but with only 750mb of Wi-Fi data (a difference we considered negligible enough to make them approximately equivalent). The cost of the iPhone was £449 when bought directly from apple, a £40 saving on the price if bought from Vodafone.

This is a rare example a subsidised handset actually working out cheaper for the consumer, however there are a few caveats involved in saying this. Firstly, the steeper gradient of the line for the ‘Contract iPhone 4s’ means that if you don’t switch contract at the end of or exercise your right to upgrade at the end of 24 months, you will be comparatively financially disadvantaged. Secondly, this is a very expensive contract, working out at just over £500 a year. There are not many people who could get enough utility out of unlimited calls and 2GB of data to make having this contract worthwhile.

The second pair of contracts compared were, we believed, a more realistic example of the kind of contracts that might be bought with an iPhone 4s (as opposed to the more expensive and recent iPhone 5). The contracted iPhone had an upfront price of £129 and a monthly price of £29 for 300 minutes, unlimited texts and 250mb of data (and 2gb of BT Wifi). The sim-only deal was the same (but with 750mb of Wifi and 500 Vodafone-to-Vodafone free minutes instead of 2gb of Wifi data) and cost £10.50 p/m with the upfront cost again being £449 for the handset.

Here the difference becomes clear. Buying the iPhone upfront and getting a sim-only contract ends up saving the consumer £60 a year without any worry about having to remember to change contract at the end of the 24 month period. Moreover there is no compulsion to sign up for a 24 month fixed contract (we have only done so for the point of comparison), and this gives the customer much greater flexibility in working out the price plan that suits them rather than being tied-in to the wrong contract. Compared with the last example, the consumer is able to get the iPhone and a sim-only contract for £400 less over two years, illustrating the importance of getting a contract which is perfectly tailored to your usage, easier when you have the flexibility associated with sim-only plans.

The final example we have chosen is from the other end of the Smartphone market, one which is characterised by competition and manufacturer fragmentation. For this example we have selected the Nokia Asha 302. On a Vodafone contract the phone is free upfront, with a £17 monthly charge giving the user 300 mins, unlimited texts and 250mb of data (the same as the previous iPhone plan). The sim-only plan is actually slightly better as it offers the same monthly allowance but with an added 500 free minutes of Vodafone-to-Vodafone calls, all for £10.50 p/m. The cheapest we found the phone on sale for was £86.50 from Amazon.

Once again, the saving over two years is substantial in comparison to the overall cost of the contract when buying the phone upfront with a sim-only plan. Not only does the consumer save £70 over two years but on top of that gets 500 free Vodafone-to-Vodafone minutes per month. The competition between outlets selling the same (or similar) handsets helps much more with consumer savings than it possibly could in the monopole iPhone market.

In conclusion the advantages of the model that T-Mobile is introducing are obvious, not only will it (in almost all cases) decrease costs for consumers but it also helps to make the pricing process more transparent. For individuals who are put off paying the large upfront costs T-Mobile are offering a pricing plan which allows the individual to pay off the phone over the course of the contract, similar to what already exists but making explicit what payments are for what. T-Mobile’s move is good for consumers but this may, unfortunately, not be recognised. Commentators have been quick to point out that when Telefonica and Vodafone dropped phone subsidies in Spain earlier this year it was a complete disaster, with both companies losing hundreds of thousands of subscribers (equivalent to millions in the US market). Hopefully things will work out differently for T-Mobile in the US.

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