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The Phone You're Paying For But Not Getting

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Mar 20, 2013, 11:00 AM   by Rich Brome
updated Mar 20, 2013, 1:41 PM

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.

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

About the author, Rich Brome:

Editor in Chief Rich became fascinated with cell phones in 1999, creating mobile web sites for phones with tiny black-and-white displays and obsessing over new phone models. Realizing a need for better info about phones, he started Phone Scoop in 2001, and has been helming the site ever since. Rich has spent two decades researching and covering every detail of the phone industry, traveling the world to tour factories, interview CEOs, and get every last spec and photo Phone Scoop readers have come to expect. As an industry veteran, Rich is a respected voice on phone technology of the past, present, and future.


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Mar 20, 2013, 11:14 AM

It's amazing how hard it is to get people to understand this

People actually think that $200+ phones are routinely given away, and that somehow doesn't come out of the monthly payment.

2. subsidies
3. monthly plan
4. ETF

all of these play into the price of the phone and plan.
Unfortunately most Americans are highly ignorant on economic issues and proudly so. They'll whine about manufacturing going overseas and then whine for more of the very regulations that force business to leave. They whine about the cost of gas, and ...
This is so true! One of the most frequent questions we get from customers who come into our mobile device repair center in Fairfax VA, is why is the repair cost almost the same as what they paid for the cell phone (for some repairs) and we have to ex...

Mar 25, 2013, 7:53 PM

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.
Well that's a very specific and unusual setup.

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 ...
I see your point. A verizon customer would have to keep there old phone for 79 months after there upgrade time to make up the $1591.00 that T-mobile is over charging.

Mar 23, 2013, 7:49 PM


Americans won't pay what a device is worth unless the cost is hidden.

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 ...
Well, yes and no.

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.

Mar 21, 2013, 6:52 AM

People also forget that the carriers get screwed by fraud/non-bill pays

They subsidize these phones (iPhones at $450 per shot) and have TONS of issues with people taking the phones and running.

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.
You're defending a circumstance that doesn't need to be defended. Companies already factor everything of running a business including lawyers and court costs to recover losses under the issues you mention. This "Should" be all factored in with a runni...
They wouldn't have to worry about people getting "free" phones and ditching the service if THEY DIDN'T INSIST ON SUBSIDIZING PHONES.

And that means those losses come out of OUR BILLS.

Thanks for providing yet another reason to end phone subsidie...
I guess you're in favor of giving more free bailout money to banks too, right? Because as we all know, many more people walk off on credit card debt, mortgages, and car loans than those who walk away from a $600 phone debt. So, we should all be sympat...

Mar 26, 2013, 6:55 AM

Here we go- Blackberry Z10 Released on T-mobile USA With Unique pricing.

T-mobile USA officially launches the Blackberry Z10 for customers. Unique price point. You have two options: 1. pay in full or 2. pay $ 99.99 now and then $18 per month for 24 months (you can pay more if you want) Total price $531.99.

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.

Mar 24, 2013, 4:45 PM

so so so

so this is what you're talking about??

https://www.phonescoop.com/articles/article.php?a=12126 »
Please explain?

Mar 20, 2013, 12:07 PM

T-Mobile's $10 discount isn't quite enough

It's a little complicated to figure out exactly what we are paying for our phones (good enough reason to change the system right there).

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...
Nice thinking about switching carriers, but again, you are missing a big piece of the puzzle. First, you usually don't get that huge $400 subsidy. Maybe on their sale phone of the week, or some odd Thanksgiving day promotion. But even so, there is so...
what are you searching for? they already offer the lowest plans in the industry.

Mar 22, 2013, 2:20 AM

Amazing way for T-mobile customers to save some cash.

I bought a Samsung Galaxy S3 from T-mobile full price. (Just don't trust Craigslist) But take that phone to Straight talk. In the store Straight talk sells flip phones that run on Verizon and Android phones that run on Sprint. (At least in my area, Indiana.) But if you get on Straight talk's site you can pay $15 for a T-mobile SIM card that supports their 4g, you now have a 4g t-mobile phone running with a 4g t-mobile sim running on T-mobile's network. (Since it is a T-mo phone running on a T-mo network, there is no reason to unlock it either.)

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 ...
Good luck finding coverage with that network. Take a road trip and mark how many spots have no coverage or if they do are serviced by painfully slow, outdated EDGE. I travel a lot and know first hand how inadequate their network is. You say you wor...

Mar 21, 2013, 11:24 PM

The Trick to a Cheap Phone at T-Mobile- BEATING THE SUBSIDY

There is a tricky way that works if you are switching to T-Mobile or qualify for a maximum upgrade online to get a really cheap price on a phone. If you are planning on going on their Monthly 4G plan, there is a better way to do it than they will tell you in the store or on the phone. Don't try and explain this to them as they are not bright enough to figure this out.

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...
I bought my S3 full price from T-mobile, if I was going to stay with them I would have surely like to have done it this way. Good thinking! Too bad it wouldn't have worked for me since I was buying the phone to use on another carrier.

Well Unless I...
You won't get a MIR if you do that. If you close the account, or migrate before the first billing cycle closes, your MIR will be invalidated. As per the conditions of the contract, the Required Data feature must be on the account, and active, for you...
There is a hidden cost to going with T-Mobile and that is their lack of coverage. Where you find coverage it's going to be mostly outdated, slow EDGE. Their 4G is as scarce as two dollar bills. And they have no 3G, even though they advertise they do...
The only way you could successfully pull this off is if the rep you spoke with didn't do their job properly, and even in that case you would pay more in the long run.

If you want to move from a contract to a no contract plan and you are within the...

Mar 20, 2013, 8:49 PM

Well good luck to those families of 5+

Sure, let's shift over to the global model and make you pay full price for your phone.

Let's see - 5 family members x 5 iPhone 5's at $649+tax. Looks like we're skipping Christmas every two years. lol.
$649 (iphone5) x 5(# lines) = 3245 (price of the phones)

$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...
How do I join your family. Either you are super rich giving all your kids almost $700 phones, or you are a very poor planner. If you can not afford to shell out $3000.00 in phones over Christmas, then that means you don't have any savings. If you r...
T Bone

Mar 20, 2013, 11:04 AM

Faulty Assumption

Service plan costs are what they are...the prices cover only the cost of providing the service plus a mark up to ensure profit, there is absolutely no part of the price that goes towards paying off the subsidy. Service plan costs would be exactly the same as they are today even if subsidies were abolished.
If that is true, then why does prepaid service cost so little, and uses the same exact towers, but also having the trade-off of more expensive phones. I must say that I agree with the article.
Your whole paragraph is incompatible with the fact that the carriers are selling phones below wholesale cost.
There is not a faulty assumption on the author's part. The subsidy is part of the carrier's costs and thus part of the cost of providing the service, so it does in fact go into the service plan costs.

I do, however, agree with you that the plans w...
If that were true, how do you explain the price difference between T-Mobile's Classic and Value plans? The only difference is the subsidy. That should be obvious, and any T-Mobile rep will tell you that, but I've heard it in person directly from T-Mob...

Mar 21, 2013, 4:32 PM

I actually did not know this

I mean I've Verizon and always knew I was getting ripped off by the shear nature of a premium carrier, but the fact that when I'm sitting on an upgrade I'm still getting gouged is pretty lame. I'm waiting to upgrade to the new G'zOne Commando guess if I couldn't afford it, I would go totally prepaid but I really like the phones I like....I will also be falling in line with all the other drones and giving up my unlimited data shrug getting me coming and going i guess

Mar 20, 2013, 2:00 PM

A Disgusting Oversimplification. ..

Highly disappointed in you Rich for this "editorial" piece that patronizes to the lowest common denominator.

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...
Did you read the whole article?

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 ...
If you're out of contact, then it's an at will condition of service.

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 ...
how could you be? i dont understand your reasoning. it doesnt make sense. Rich analyzed it very well and mentioned all possibilities. we all know subsidies kill wireless carriers. they lose money on two things: 1. Cost per gross acquisition, and 2. su...
"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 of not going to happen."

T-Mobile is already doing it. Pretty sure this is how Europe's wireless market...

Mar 20, 2013, 4:36 PM

Lines 3 thru 5

How does subsidy amount factor in for the add a line charges? Are consumers robbing from the big 4 if they have more than 2 lines?
actualy they are saving more if they have more lines under family plans.

Mar 20, 2013, 3:57 PM

Need More Regulations

A few of us always catch hell for this, but the wireless industry is running amoke without much of a leash. Regulations please!

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 ...
Yes, what we need are even more regulations in society because we have to protect those who are too stupid and lazy to pay attention to what can clearly be seen with even a passing glance at the costs of cellular communications. It sure would be a sh...

Mar 21, 2013, 3:55 AM

MetroPCS, Cricket, Virgin, or Boost...

...yeah, you'll save a boatload of money. I did by going with Virgin and paying just $149 for an LG Optimus Elite.

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.

Mar 20, 2013, 1:57 PM

Great Article

One other thing I believe having subsidies inflates is the non-subsidized cost of phones. Would anyone ever at this moment be purchasing a Samsung Galaxy S 3 if it's cost was $599.99 (current price on VerizonWireless.com off contract)? I bet not, so they would have to lower the price right?
I agree...great article & makes sense!

Can't believe some of the hater's responses. Can't reach 'em all evidently. 😎
This IS a great article and I've already shared it with friends and colleagues. Rich is a new hero amoungst strangers and consumers 😁

But, seriously here. Inflated pricing is all in perspective. As it stands, manufacturing costs of say $175 are...
you can blame the carriers here for charging these costs. It is their fault not the manufacturers.

Mar 20, 2013, 9:08 PM

BYOD and the value plan

What I'm not liking is tmobiles current contract requirement for the so called value saving of 20.00 a month. I could come to them for a value plan and still be forced into that contract regardless of me bringing my own phone. That's the lop sidedness about the deal.

This isn't about their new rumored changes regarding the un-carrier plans coming.
is averyone's aware of uncarrier? 😳
you can always get prepaid 🙂

Mar 21, 2013, 1:33 AM

Fantastic Article

Fantastic Article, Rich. I thought this nailed all of the topics of what is going on in the wireless industry and trends today. I like the fact that T-mobile is going from Classic to Value plans with the ability to pay over 20 months but once the 20 months are over or if you want to pay the phone off quicker you can upgrade whenever you want. Moreover, as you noted in your excellent article, your plan drops $20 per month. If you have a discount even more.

Well said all around

Adam. (Aka Nextel1😎

Mar 20, 2013, 8:14 PM

Prepaid vs Postpaid - Oversimplification, but correct

The article does over simplify the phone subsidy argument, but it certainly is more complicated than slapping a $20.00 value on a phone subsidy. Quite frankly, I think its closer to $30.00.

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...
Very well put. I still use Virgin Mobile as my service provider. Although the phone selection isn't as good and the technology is slower at advancing, you get the trade-off of dirt cheap service.
well put but one what phone do you have and two ill pay what I am paying for my phone that does more then what my phone did two years prior and is keeping pace with what is coming out next.
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