The Phone You're Paying For But Not Getting
Every day, countless Americans get ripped off. They give their cell phone company an extra $20 each month and get absolutely nothing in return. It doesn’t go toward service; it’s a gift. It’s a scam.
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Imagine a world where you pay for gasoline bundled with your car loan payment in a single monthly fee. Now imagine that your car loan is paid off, but the monthly bill doesn’t go down. In addition to paying for gas, you essentially keep making payments on the car for which you've already fully paid. No one in their right mind would sign up for such a crummy deal. In fact, if any company had the nerve to offer such a contract to poor saps, Congress would jump in and pass laws banning the practice.
And yet, that’s exactly the raw deal most people in the U.S. are getting with their cell phone contract.
The crux of this scam is something called a subsidy. It’s supposed to mean that your cell phone carrier “subsidizes” the cost of your phone. But all too often, what really happens is you subsidizing your carrier’s profits.
Subsidies exist because mobile phones are, in fact, quite expensive. An iPhone 5 actually costs at least $650. If everyone was forced to pay that amount up front, it would deter a lot of people from purchasing new phones, which could in turn hold the industry back. Little Johnny would be more likely to get a Lego set for his birthday, instead of his first Android phone.
So to fight sticker shock, most phones are sold well below cost, thanks to a subsidy. That subsidy isn’t free, of course. The carriers aren’t that nice. You might pay $199 at the register for a new iPhone, but the carrier is subsidizing the remaining $400 - $450. This means around $20 of your monthly plan goes toward repaying that subsidy ($20 x 20 months = $400.) To make sure it gets its money back, the carrier locks you into a two-year contract. When the phone is paid off, the carrier will let you get another phone at the low (subsidized) price and, once again, pay it off over time, under a new contract.
That sounds simple and fair enough. But what happens when your 20 months are up, you’re eligible for a new (cheap) phone, and you don’t immediately get one?
Maybe you heard that a hot new phone is coming out soon and you want to wait. Or maybe your old phone works fine and you "just don’t need a new phone yet.” Sound familiar? I hear friends and family members say things like this all the time.
So you wait. Your old phone is paid off. Does your monthly cost go down? Can you put your subsidy toward a future new phone? No.
You’re still paying a subsidy. You’re still paying for a new phone. But you’re not getting that new phone. Your carrier is simply pocketing that $20/month and laughing all the way to the bank. You’re being scammed.
You might think that you’re in the clear if you bought an unlocked phone. Some major carriers offer “SIM-only” options for people bringing their own phone to the table. Your carrier may also let you pay full price for a phone up-front, and pair it with a traditional post-paid plan under what they call “month-to-month” service. This will save you from a two-year contract. But unfortunately, this is an even bigger scam. That’s because, if your plan has the same monthly cost as if you were getting a discounted phone, then that plan includes a subsidy. That’s $20/month down the drain, and it starts from day one. You paid full price for your phone and you’re paying for one in your monthly plan. You’re essentially paying for two phones but only getting one.
How do you avoid this scam?
One way to avoid the scam is to simply get a new phone the minute you’re eligible. (Do not, under any circumstances, wait for the new iPhone that you heard Apple might announce soon.) The upside is that you can keep the major carrier you like, the coverage that works where you need it, the plan you like, and the best selection of hot new phones. The downside is that you’re locked in a rigid schedule of getting a new phone about every 20 months.
You could also switch to a prepaid plan with your current carrier, or an all-prepaid carrier like MetroPCS, Cricket, Virgin, or Boost. With pre-paid plans, there’s no contract, and the plans cost less per month since they don’t include that subsidy. Of course, without a subsidy, you’ll also pay full price for the phone up front, which can put a hurt on your wallet. MetroPCS and Cricket offer some financing options, but you have to deal with a third-party company, and they only spread the payments out over three months.
The other disadvantage of prepaid is the device selection. The big four carriers have severely limited prepaid phone choices compared to their post-paid lineups. MetroPCS and Cricket are doing a much better job of offering higher-end phones than they used to. For example, you can now get Samsung’s Galaxy S III from both carriers. But they still don’t have the all-star lineup that the big four do on post-paid plans.
T-Mobile is the only top-four carrier fighting subsidies head-on with a no-compromise option. They do offer “Classic” plans with traditional subsidies, but also “Value” plans that don’t have a subsidy, and therefore cost significantly less per month. The Value plans are available with their main lineup of phones, not the limited prepaid lineup. They also offer an interesting option of paying for your phone with an “installment plan” instead of a subsidy. It’s just like a subsidy, minus the scam. Your monthly bill simply goes down once your phone is paid off in 20 months. In fact, the phone installment payment is clearly itemized on your monthly bill, and it’s less for cheaper phones, as it should be.
This gives you the flexibility to upgrade to a new phone whenever you like. This also gives you more options for managing your budget. When you reach the end of your 20 months and your phone is paid off, you can get a new phone, or - if money’s tight - hold on to your existing phone for a while longer, enjoying your new, lower monthly bill. Perhaps you want to hold out for the new iPhone. Go ahead; you won’t be penalized $20/month for waiting, as you would with a traditional post-paid plan.
We can only hope that all carriers will move toward a common-sense, consumer-friendly pricing structure like what T-Mobile is doing. In the meantime, don’t get scammed.
Illustration by Charles Kline
It's amazing how hard it is to get people to understand this
3. monthly plan
all of these play into the price of the phone and plan.
Do the math
5 Galaxy s3= $ 2750.00
1 hot spot = $70.00
5 lines with 8gb= $280.00
1 2gb hotspot = $30.00
Total $310.00 month
2 year = $10,270.00
5 galaxy s3= $999.95
1 hot spot = $0.
5 lines with 1 hot spot with 10 gb $320.00 a month
2 year= $8679.95
Now who is cheaper and getting ripped off. Do your math before you start call all carriers a scam.
But you missed the point of the article. It's not about which carrier is cheaper.
It's about the structure of how your phone it paid for. It's about how you are penalized if you don't upgrade at an ...
Dan Hesse once stated the "sweet spot" for high end phone pricing is $199 and he Iis right on the money with that figure.
Yes, we all know you are financing a phone we as Americans just dont want to talk about it.
I guess Rich intended the article to be a thought provoking call to action of sorts. Correct me if I am wrong but he wants carriers to offer a no contract bring your own phone rate plan theatsubscribers who have completed their commitment could tak3 advantage of the savings as well or have a financed portion of the bill that would itemize phone payments from service payments.
I dont see ither happening. But wow this editorial got alot of traction ...
T-Mobile does offer what you describe. And it does allow them to still market high-end phones at $199, and that's exactly what they're doing.
People also forget that the carriers get screwed by fraud/non-bill pays
People using stolen information/fraud in general is a major problem for the US carriers. Some people literally don't pay their bills and then just sell the phones when they've been disconnected - and end up actually making a profit.
So while they charge you more monthly due to the subsidizing factor, they also lose a ton from people taking advantage of the system.
And that means those losses come out of OUR BILLS.
Thanks for providing yet another reason to end phone subsidie...
Here we go- Blackberry Z10 Released on T-mobile USA With Unique pricing.
You also save money on the monthly plan. After the $18 per month is up, you also save on top of that. You can also pay that as quick as you want with no finance charges. Should be an interesting idea for T-mobile. Watch other companies to follow suit.
so so so
T-Mobile's $10 discount isn't quite enough
Your first subsidy with a new carrier can be as high as $400 for some of the very popular high-end phones. That works out to about $20/month.
But your "upgrade" discount is usually only about $200-250, which is about $10/month.
So T-Mobile's option only relieves us of the subsidy scam if we are planning on staying with the same carrier (for whatever reason) by switching to the non-subsidized plan for a renewal, AND if we took advantage of the $400 discount for the first phone.
If you truly want to not waste money, you have to switch carriers every 2 years to get $400 back from the $20/month you...
Amazing way for T-mobile customers to save some cash.
Now I pay $45 a month for unlimited Talk and text and data (The data is limited to 2gb, which most places are now but the T-mo prepaid plan that limits you to 2gb is $60 a month.) You would think ...
The Trick to a Cheap Phone at T-Mobile- BEATING THE SUBSIDY
Lets give you the example of today, March 22nd. You want to go on Monthly 4G and buy a Samsung Galaxy Note 2. So you walk into T-Mobile (make sure its a company owned store or company website), get their Monthly 4G plan for $60 bucks, pay $699 for the Galaxy Note 2, and walk out the door. Done. That's the way T-Mobile wants you to do it. That's the way you are supposed to...
Well Unless I...
If you want to move from a contract to a no contract plan and you are within the...
Well good luck to those families of 5+
Let's see - 5 family members x 5 iPhone 5's at $649+tax. Looks like we're skipping Christmas every two years. lol.
$20(installment per line) * 21 (months)=$420 (equipment Installment Plan) x 5(lines) = $2100 total EIP
3245(total price of teh phone) - @2100 (EIP) = $ 1145 Downpayment
Plan $79.99 tal...
I do, however, agree with you that the plans w...
I actually did not know this
A Disgusting Oversimplification. ..
What bothers me is people will read this and actually feel "informed".
Its easy to bash the top 4 carriers as they assume most of the risk and trailblaze into the future with cutting edge innovation that can only come with the resources of deep pockets. Cellular service is not a charity, networks don't build and and maintain themselves. (Unless you're an MVNO)
You said yourself, without a subsidy this would deter many people from getting newer technology and stiffen innovation.
If the purpose of this editorial was to get carriers to offer a no contract or bring your own phone differetial in pricing, that's a whole lot...
I have no problem with the cost of service. Nor do I have a problem with T-Mobile's Equipment Installment Plan, which is very much like a subsidy, but fair.
I only have a problem with the very specific situation w...
Carriers should be figuring in all the service costs for research, developement, building new technology and maintaining staff, leasing etc. That part of service billing is understandable. Subsidizing phones is a separate entity. It is ...
At that point youre a willing buyer paying a willing seller's pricefor goods and services.
Your argument assumes as well, that your quality of service with Cricket, Metro ...
T-Mobile is already doing it. Pretty sure this is how Europe's wireless market...
Lines 3 thru 5
Need More Regulations
I want to commend Phone Scoop for bringing this issue to the front again. While we purchase phones, most tech geeks are aware of the shady practice. However, most consumers are not. They don't generally read the print of regular price. They only see what they are paying out the door. I have said for many years that this is a scam. Yes, I understand the price to offset the subsidy, but as stated in the article, the end of contract bill should reflect a satisfied pay down on the phone and forego the 20 dollar charge. Otherwise, we are still paying for a paid off product.
Regulations need to be implemented ...
MetroPCS, Cricket, Virgin, or Boost...
But then you get what you pay for--which is to say, not much, as Virgin's coverage and data are absolutely dreadful. I'm currently trying to figure out if I'm going to sign up with AT&T.
Can't believe some of the hater's responses. Can't reach 'em all evidently.
But, seriously here. Inflated pricing is all in perspective. As it stands, manufacturing costs of say $175 are...
BYOD and the value plan
This isn't about their new rumored changes regarding the un-carrier plans coming.
Well said all around
Adam. (Aka Nextel1
Prepaid vs Postpaid - Oversimplification, but correct
While comparing prepaid prices to post paid prices seems like a good standard, there is a bigger picture. Prepaid simply does not have the same overhead and risk postpaid plans have. They typically do not have expensive retail stores to maintain, call centers full of upper tier tech support and finance. They also do not have to endure the risk of customers abandoning accounts. Also, prepaid carriers do not have to worry about roaming.
On the flip side, post paid plans get the luxury of overages, late charges, extra charges and features, and q...