From the Counter: The price of "Free."

The Typical "Free" PhoneIf you’ve followed our articles here at PhoneCan, you might see that we have a thing or two to say about contracts.  In fact, some might say we’re talking about them too much, that we should be talking about important things, like iPhone rumors, telling you which carrier is best, and how to brew the perfect cup of coffee..  well, maybe not that last part.

The reason we spend so much time talking about Contracts is that it’s something that we hear about everyday.  Customer want to upgrade, but they already used their upgrade and carriers are trying to “punish” them by making them pay “retail.” or a customer wants to know why the phone they bought just a few months ago is already obsolete.

We also believe that contracts are the single largest thing holding back true innovation and pro-consumer change from the US cellphone market.  Carrier’s need to change, but before they do we as consumers need to show them that we’re ready for it.

What I’m talking about is our addiction to the term “Free.”  We want Free phones, cheap (or free) services, Free accessories, and when we get what we want, we complain about something else.. We complain about only getting to buy a new phone every two years, or how when something breaks we get a used device, or how certain phones REQUIRE features we might not want, like unlimited data.

But nothing is ever free, not really.  Sure, you might not pay anything up front for a phone, but you’re paying for the service to use that phone.  You might even be paying for services you wouldn’t pay for otherwise to get the phone at that price (some retailers offer steeper discounts if you purchase on a higher value plan).  Maybe your paying by giving up the ability to fully customize that phone, or accepting one jammed full of bloatware you can’t remove.  Nothing is ever free, so why are carrier’s so quick to offer us “free” phones?

...

Phones are not free, they’re not even cheap:

One common misconception is that Verizon, AT&T, etc purchase phones for a fraction of their selling price and that the “full retail pricing” is just something carrier’s make up to punish you for buying your phone early.

Phones are marked up.  That much is a given.  The fact that high end phones, no matter the specs somehow always end up around $600 should prove this, but it’s not carriers and stores marking up those phone prices, it’s the hardware makers.  Motorola, HTC, Apple, etc. are the ones making a killing on the retail cost of a phone.  Sure, you just paid $199 (or less) for that sick new smartphone, but your carrier is paying a lot more than that to the company that made that phone.

I don’t know how much a Droid X or an iPhone 4 “should” cost.  That’s one of the problems with the subsidy model, but what’s important is that these phones are expensive, and they cost carriers a lot more than the 199 you paid.  For example, if Verizon is selling the Droid x for $590, chances are that Verizon paid at least $550 for it to Motorola.  Yes, there is a markup, but this isn’t there to make a “profit” or to “punish” you, but rather because selling anything at cost is costing you money.  What I mean is that once a phone is purchased, it still costs them money to ship it, to store it, and most importantly, selling it retail means that they won’t get contract money.

Phone’s aren’t cheap, they’ll never be “cheap.” Why is this important?  Because it means when you buy that phone for 199, the store and the carrier lose  money on that transaction.  This is one of the reasons that contracts (and upgrade policies) are so stiff.  Every time you upgrade, you cost them money.  So if they are to make a profit (and profit is not evil), they need to make sure that you actually pay them for enough months to cover your service and make up the cost of the phone.

What makes a phone “free?”

So we know that phone’s arn’t free, or even as cheap as what we pay on contract for them, what makes one device “free” and another still cost a couple hundred bucks?  This is the initial cost of the phone.  If you’re buying a phone for “free” over one that costs you something, you’re typically giving up quite a bit to do so.  There are four main reasons why a phone is sold as “free.”

  1. The phone was built to be low cost.
  2. The phone is reaching end of life.
  3. There is something wrong with the phone.
  4. It’s on promotion.

The phone was built to be low cost:

This is the easiest one to explain.  Companies will make an “Entry Level” device, sacrificing specs and/or software in an attempt to get the device as close to free as possible.  A good example of this is the Motorola Backflip, Citrus, or Devour.  These are cheap devices that give up a lot of functionality in the name of price.  Not all cheaply made phones are low quality, however (see the LG Optimus S line) but if you get a cheap phone, know that it’s not going to be top of the line or “first” for anything.  If you receive any software updates, they will be months late, but it’s likely you’ll never see them at all.

The phone is reaching end of life:

This is something we see all the time in the industry.  Customers wait for months for a phone to drop in price, only to come back complaining a few weeks later when an updated version of the phone they just bought is suddenly released.  Phones have an average lifecycle of about a year anymore, so once a device is out for 10+ months, carriers will drop the price on it, hoping to clear out their remaining inventory before the next model shows up.  If a phone’s been out for awhile and suddenly drops in price, it means the “new and improved” version is just around the corner.

There’s something wrong with the phone:

This is an unfortunate side effect of the subsidy model.  Carriers have to commit to purchasing a minimum number of handsets in order to carry it.  For the popular ones, this isn’t an issue; but when the device is defective it means that they might be left with millions in defective inventory with no way to return it.  So what are they supposed to do?  Most of them end up dropping the price.

Currently, Verizon is doing this with the Kin line of phones.  These phones got universally negative reviews and were quickly pulled at their initial launch because of it.  Now Verizon and Sharp (the company that made the phones) re-released them as “feature phones.” for bargain bin pricing.  Because these are currently the ONLY devices on verizon’s network that allow browsing over wifi without requiring a data plan, expect quite a few people to buy them.

Make no mistake about it: even with the new hardware, these are terrible devices.  Verizon’s trying to clear their inventory of them, so they drop the price, pushing them out the door as soon as possible.  They’re not trying to shove the phone on you and laugh all the way to the bank.  Most carriers will do what they can to make the contract with this device as painless as possible.  But if a phone (especially a newer one) suddenly plummets in price, check the reviews.

It’s on promotion:

Every once and awhile, a phone will get cheaper for a time (possibly even free).  This could be because of the holidays, or maybe Samsung paid the carrier to really push their devices that much.  The end result is the same, a traditionally high value phone is suddenly cheaper and there’s nothing wrong with it, and it’s not that old.  There are other reasons to avoid a contract, but if you take one anyway, THIS is what you want to keep an eye out for.  It’s the only time you’re getting a “good” value by buying a cheaper phone.

Wrap Up:

We’re not a fan of contracts, something we’re sure to talk a lot more about, but if you choose to sign a contract, I hope I’ve shown you some of the true costs of the “free” phone.

As consumers, we told carriers the maximum we were willing to pay for a cellphone on contract is $250 (Samsung Epic/Sprint).  Sure, $250 (or even $199) might seem like a lot now, but remember you’re deciding on a device that you will use for the next two or more years, with you giving thousands of dollars to that carrier.  Sure, it might hurt paying that $200 for a device instead of grabbing whatever you can get cheaply, but for just a fraction of what you’re paying during those two years, you’ll end up with a much better device.

If you’re unwilling to go the contract free route (yet), at least stop going for the free phones.  You’ll be glad you did.

Related PhoneCan Quickie articles