Are You Being Charged Too Much For Subsidies?

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At its recent “Un-carrier Event” held in New York, T-Mobile CEO John Legere took the stage and had some choice words to say about the concept of carrier subsidies. “This is the biggest crock of s___ I have ever heard in my entire life,” he said. “Do you have any idea how much you’re paying?”

Needless to say, T-Mobile does not approve.

Legere went on to announce T-Mobile’s new Simple Choice Plan, a plan that eliminates contracts and, perhaps more importantly, phases out carrier subsidies. While customers can still pay off the costs of their phones over time, their monthly bills drop after the device has been paid off, creating a structure that, oddly enough, is unprecedented. So are subsidies and the subsequent binding contracts as problematic as T-Mobile would have you believe? Let’s take a look.

What is a carrier subsidy?

It may not be clear to all wireless customers what exactly a smartphone subsidy is, so here’s a quick primer.

Essentially, smartphones are expensive devices that cost far more than what customers typically pay for them. This is because wireless carriers pay for part of the cost of the phone — a subsidy — so they can offer it to customers for more affordable prices.

To put this into perspective, the 16GB model of the Apple iPhone 5 costs $700 unsubsidized. That’s not a small amount of money. Meanwhile, Verizon Wireless offers the device at a subsidized price of $200. This, of course, is not done out of sheer generosity. Rather, there’s a catch: users who buy the phone through the carrier are required to sign on for a two year contract at hiked up rates, which is the provider’s way of ensuring that it gets its money back from you…and then some.

Am I ultimately being overcharged due to the subsidy?

That all depends on what smartphone you purchased at a subsidized price and whether or not you’re upgrading every time you renew your contract. Though carriers would lead you to believe that their only way of recouping expenses is to hit you with early termination fees in the event that you bail early on your two-year contract, the fact is that their monthly rates are also higher than they normally would be to accommodate their expenditures and line their coffers.

Therein lies the appeal of T-Mobile’s service. Without it attempting to gouge customers to make up for subsidy costs, their monthly rates are now lower than those of the other Big Four carriers. Yes, with the Simple Choice Plan, users can still opt to have T-Mobile partially subsidize the cost of the hardware. But as stated, once they’ve paid off the price of the phone in full over time through separate monthly charges, those charges are dropped from their monthly bill and the cost goes down.

With the other Big Four carriers, regardless of whether or not the customer has paid off the total cost of their phone over time, their monthly charges remain the same. The extra charge for device costs (which usually comes out to something like an extra $20 per month) is not listed separately on phone bills or plan breakdowns to fool customers into thinking that they aren’t paying more as a result of the subsidy. The subsidy charges from carriers are baked in, making it appear as if buying a new, subsidized phone and entering a two-year contract will cost you the same amount per month as it would to get their wireless service on a device that you already have. It’s true, it does cost you the same amount. That’s precisely why it’s unfair.

Some people might think that signing up for wireless service with a device that they have already paid for in full will save them a good chunk of money per month, but it won’t. Regardless of whether or not they’re beneficiaries of device subsidies, customers are always paying more than they should have to so the carrier can recoup the costs for subsidies and turn a profit. These higher rates exist simply to help boost the carrier’s bottom line and they are the same no matter what.

So you’re essentially paying more for subsidies that you may not have even received, depending on your situation. That’s why it’s important for those who are electing to stick with the traditional US model of carrier subsidies to make sure they’re at least getting their money’s worth: because they’ll be spending the same amount regardless.

The thing is, the subsidy model could work out to be a decent deal if the phone in question is a high-end model (and therefore more expensive) and if the customer makes sure to upgrade every two years. That way, the customer is ensuring that they invest in a new phone right around the time that they’re finishing paying off the full cost of their last device so they’re never paying the carrier’s hiked-up rates in exchange for nothing.

On the flip side, this setup is far from ideal if a consumer invests in a mid-range or low-end phone. With a lower unsubsidized cost, the user is more likely to pay off its total value long before their two-year contract is up, allowing them to pick up a new device.

Analysis

The lesson here is simple: customers might as well get the most out of carrier subsidies, because with exception of T-Mobile’s new structure, they’ll be paying for them anyway. Whether or not a customer has paid off the full cost of their phone, they will always be paying at a higher rate due to wireless carriers looking to recoup losses from subsidies and turn a profit. Bearing that in mind, you as the customer should not only pick up the best (read: most expensive) phone on the market, but also get a new one every time you re-up on your contract when your current one expires. That way, at least you’re getting something for all the money you’re throwing at your service provider.

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