What Are Phone Subsidies?
Wireless phone subsidies still remain a mystery to a lot of people, so
get to the
bottom of it here! Ever wonder how wireless providers can
phone that is normally hundreds of dollars for $50, or even give it
away for free? The actual cost of wireless phones can very
fairly inexpensive (ex. $50) to very expensive (ex. $700 or more).
I'm referring to the actual cost, that's the cost that the
wireless company pays to the phone
manufacturer (ex. Samsung,
LG, Apple, etc.).
There's actually a LOT of technology in wireless phones that most of us
tend to take for granted.
Consider, vibrant color screens, microprocessors (ex. quad
chips), memory, metal,
plastics, lithium battery, GPS chip, cameras, multiple
antennas, the operating system,
actually a lot of costs for research and development, as well as
manufacturing. Cell phones really are very high tech toys!
Think about the software to communicate with the cell tower
it knows how to hand off from tower to tower without dropping the call,
and often while traveling 65 miles per hour!
Making this work correctly is truly rocket science!
such technology comes a cost, and while costs have come down over the
years as we get better and more efficient at building them, there's
still a real cost to wireless providers.
Most people, however, do not want to pay hundreds of dollars for what
they consider to be an average smartphone. And remember that
addition to the monthly service bill you get. So, to help
customers, wireless companies historically discounted phones when you
up for a new plan. This is part of what is known as COA, or
Of Acquisition. This is part of the cost to get a new
includes a number of factors, including the phone cost (or subsidy),
dealer compensation, marketing, etc. What this means for you
that the wireless carrier actually may have paid $700 for a phone that
they then sell to you for $200. That difference of $500 is
the handset or phone subsidy, and actually represents an initial loss.
They're not simply taking a smaller profit like putting a
shirt or shoes on sale. You're literally payment less for the
phone than the carrier actually paid for it!
Subsidies are the primary reason why wireless companies have required
that you sign a contract. And often, the longer the contract
sign (ex. 1, 2, or 3 years), the greater the discount you can get on
the phone that you want. Often times people complain
contracts, however, consider that for each new customer that they get,
wireless providers are losing money; at least initially. That
if you were to pay $200 for a $700 phone, and pay $50 a month for two
months of service and then cancel your plan, they would have not only
lost on the cost of the phone, but also the other costs that go into
acquiring you as a new customer (dealer compensation, marketing, etc.).
That's why they have you sign a contract. That
decreases the likelihood
that they won't lose money on you. And as much as we like
things for free or at deep discounts, if wireless companies don't make
money, they simply
So, if you terminate your contract, there's an Early Termination Fee
that you'll pay. This is used to help recoup their costs.
You'd be surprised how long it takes for wireless companies
break even on you as a new customer. Depending on the type of
phone you buy, and the type of plan you have, it could take upwards of
6-8 months! There was an industry makeover a number of years
ago whereby the ETF fee became prorated as you near the end of your
obviously as time passes carriers need less money to recoup their cost
and to break even on a given customers, so charging the full $150-$200
ETF wasn't "fair."
With all of this background you might be asking yourself: "What does
all this have to do with prepaid wireless where there are no
contracts?" You might notice at stores that the same phone
cost more if you're a prepaid customer than if you choose postpaid;
this is the no contract price. The difference is because of
the subsidy. Without a contract,
companies have a higher risk that you can leave anytime. So
they subsidize the phone too much, there's a greater chance that
they'll lose money on you.
As technology and economies of scale (i.e. volume) increase, prepaid
wireless providers were able to sell phones with zero subsidy.
However, for the higher end, nicer phones, there's almost
some kind of subsidy. So yes, as a prepaid customer you'll
usually pay more for your phone, however, you also have the luxury of
changing wireless providers at anytime, and without any penalties.
There's definitely a lot of value in having that freedom!
One last note about subsidies. You may often see really good
wireless phones that are almost the same, or even sometimes lower than
phones sold with postpaid plans. This is typically due to the
fact that those phones are not new; they are refurbished. I
happen to be a big fan of refurbished phones. If a phone has
used, companies can't legally sell them as new. However, the
is that refurbished phones undergo careful scrutiny that they function
correctly, and typically you can't even find a scratch on them, because
they'll often replace the casing as part of the inspection process.
So as long as the phones comes with some kind of warranty
days), I wouldn't be turned off by refurbished phones. In
you can often get a much nicer phone at a great price! And if
buy it with a credit card that offers extended warranties on electronic
products, you may be able to have even greater peace of mind knowing
that you have even longer coverage in case something goes wrong.
But let's be honest. Most of the time we have
phones because we drop them one too many times, as opposed to a
refurbished phone having a problem because it was "previously enjoyed."
Read more about Cell
actually are options to get a free prepaid cell phone. Learn
about government subsidized programs for income eligible households at Free
Cell Phone Service
, or shop for "previously enjoyed" phones
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Wireless Phone Subsidies