What Are Phone Subsidies?Wireless phone subsidies remain a mystery for most, so lets get to the bottom of it here! Ever wonder how wireless providers can sell a phone that is normally hundreds of dollars for $50, or even give it away for free? Well, the actual cost of phones can very from fairly inexpensive (ex. $50) to very expensive (ex. $500). When I'm referring to the actual cost, that's actually the cost that the wireless company pays to the phone manufacturer (ex. Motorola, Samsung, LG, etc.). There's actually quite a bit of technology in wireless phones. Consider, color screens, microprocessors, memory, metal, plastics, battery, GPS chip, the operating system, etc. There's actually a lot of costs for research and development, as well as manufacturing. Cell phones really are very high tech devices. Think of the software to communicate with the cell tower so that it knows how to hand off from tower to tower without dropping the call. Making this work correctly is actually rocket science! With 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. Most people, however, do not want to pay hundreds of dollars for what they consider to be an average phone. And remember that that's in addition to the monthly service bill you get. So, to help customers, wireless companies will discount their phones when you sign up for a new plan. This is part of what is known as COA, or Cost Of Acquisition. This is the cost to get a new customer, which includes a number of factors, including the phone cost, or subsidy, dealer compensation, marketing, etc. What this means for you is that the wireless carrier actually may have paid $250 for a phone that they then sell to you for $100. That difference of $150 is called the handset/phone subsidy, and actually represents an initial loss. Subsidies are one of the major reasons why wireless companies require that you sign a contract. And often, the longer the contract you sign (ex. 1, 2, or 3 years), the greater the discount you can get on the phone that you want. Often times people complain about these contracts, but consider that for each new customer that they get, wireless providers are losing money; at least initially. That is, if you were to pay $100 for a $250 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 guarantees that they won't lose money on you. And as much as we like getting things for free or cheap, if wireless companies don't make money, they can't survive to offer exciting services, good, reliable networks, etc. 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 to 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! 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 will cost more if you're a prepaid customer than if you choose postpaid. This is due to the subsidy. Without a contract, wireless companies have a higher risk that you can leave anytime. So if 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 are able to sell phones with zero subsidy. However, for the higher end, nicer phones, there's almost always 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. You may often see really good prices on prepaid 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 been used, companies can't legally sell them as new. But the reality is that refurbished phones undergo careful scrutiny that they function correctly, and typically you can't even find a scratch on them. So as long as the phones comes with some kind of warranty (ex. 90 days), I wouldn't be turned off by refurbished phones. In fact, you can often get a much nicer phone at a great price! And if you 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 problems with our phones because we dropped them one too many times, as opposed to a refurbished phone having a problem because it was previously enjoyed ;-).
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