Blog Post

Phone subsidies: Are they just bad loans in disguise?

Stay on Top of Enterprise Technology Trends

Get updates impacting your industry from our GigaOm Research Community
Join the Community!

Iliad’s Free Mobile has opened a new front in its war with France’s incumbent operators. It’s taking Vivendi’s SFR to court over the handset subsidies it charges, claiming they amount to usurious loans that consumers wind up paying back in the form of hidden fees in their contracts, according to Bloomberg.

Iliad founder Xavier Neil told France’s Capital magazine that those fees wind up amounting to interest rates of 300 to 400 percent in a one-to two-year contract. That may sound excessive, but if you take a closer look at huge gap in pricing between prepaid and postpaid carriers, it doesn’t seem too far off base.

Free Mobile, for instance, doesn’t offer a subsidy on its devices and it manages to sell voice and data at ridiculously low rates, which is what set off the France’s price war in the first place. Of course, Free uses a few technical tricks to keep its prices low, the biggest being the 4 million home and business Wi-Fi access points it uses to offload data traffic.

But shunting traffic off of expensive cellular networks doesn’t explain the price differences entirely. You only have to look to the U.S. prepaid and mobile virtual network operator (MVNO) sectors to see that. Prepaid operators like Leap Wireless’s(s leap) Cricket and MetroPCS(s pcs) offer voice and data plan equivalents to AT&T(s t) and Verizon’s(s vz) at very steep discounts. They require customers to pay all or most of the costs of their handsets up front. In exchange, they not only charge cheaper rates but don’t tie customers down to contracts.

SIM cards galoreThe price gap is even more visible when you start looking at the new batch of MVNOs emerging in the U.S. Operators like TracFone’s(s amx) Straight Talk, H2O Wireless and Red Pocket just sell SIM cards, but they offer unlimited voice and SMS plans as well as data buckets that undercut major carriers’ prices by half or more. These operators have no ingrained technology advantage. They’re buying their minutes and bytes from AT&T and T-Mobile at wholesale rates, but they’re charging significantly less when it comes to retailing the final product.

In Europe, procuring your device and your service plan separately is common, but it’s still very much a foreign concept in the U.S. where consumers have become accustomed to the idea that smartphones are cheap disposable electronic goods. Carriers have been more than willing to reinforce that misconception so long as customers are willing to pay high monthly rates and sign long-term contracts.

There are signs of change, though. T-Mobile – which already offers some of the cheapest rates for a major carrier – is aggressively pushing its value plans, which offer significant discounts on voice and data plans if subscribers pay for their phones up front or bring their own devices to the party. It’s going to take more than just T-Mobile to change consumer mindset. Other carriers have signaled they’re open to the idea of unsubsidized plans, but the impetus for change may come from consumers, not carriers.

There’s a growing discontent with the high price of mobile service, and a sizable number of prepaid operators and MVNOs have arisen to feed that discontent. Eventually the realization will follow that the high prices we’re paying aren’t necessarily for data, rather we’re paying back the mortgage on our phones.

Featured photo courtesy of Shutterstock user Stuart Miles; SIM cards image courtesy of Flickr user mroach

12 Responses to “Phone subsidies: Are they just bad loans in disguise?”

  1. Lynne Gregg

    I have long predicted that the wireless operator business model and service portfolio would follow the wired. That is to say: per minute pricing will be replaced by unlimited plans, data use will overtake voice (but you still have to be able to hold up a call), and service bundled with equipment will go away. Not quite there yet, but that’s where it’s headed.

  2. Tristan Milgram

    This is a ridiculous article. Carriers buy phones from OEMs and sell them with subsidies to promote sales. Otherwise people would be hesitant to spend the full price of the phone. By locking customers into a contract they guarantee a minimum revenue that over time covers the cost that the carrier subsidized. It’s not a bad loan, and it’s not interest. Yes, prepaid carriers and others aggressive postpaid entrants manage to charge less. These carriers either operate at a lower cost, invest lest in their network buildout or quality, and are simply less profitable. That’s why many struggle to make profits and many go bankrupt. Larger carriers have higher margins, and can afford more promotions, faster network buildouts, etc. There’s no conspiracy or scam. Anyone with experience in wireless writing an article like this should be ashamed. Sometimes things are just what they are; there’s no hidden interest here folks.

    • PrepaidWireless Guy

      This is right on. Yes, everyone should look at the total cost of ownership, which includes the price of the phone and the monthly service. That’s why prepaid wireless is such a viable option these days, particularly has the selection of smartphones have been improving so dramatically in recent years. It’s becoming a low margin commodity business, which is why many carriers are charging lower prices. In the long term, this simply weeds out those with shallower pockets. But let’s not fool ourselves; many of these carriers are not profitable.

    • Kevin Fitchard

      Hi Tristan,

      I used loans as an analogy, riffing on the allegations made by Iliad, but I think it’s a useful analogy. Carriers certainly don’t consider subsidies loans, but they essentially function the same way. Carriers take a big hit on customer acquisition up front, which causes their margins to suffer, but then recoup those costs over the life of the contract. I believe you’re right that there’s nothing in the price structure of plans carriers would term “interest”, but those costs are built into their pricing structures. Just look at the costs charged by T-Mobile for its classic versus value plans. Over a two-year contract, the additional plan fees in most cases amount to far more than the original subsidy.

  3. Stuart

    Subsidized phones are usually locked to the carrier and have bloatware installed and some features crippled. Depending on how you use your phone you can save a lot by bringing your own device and going pre-paid.

  4. keninca


    The government forced telcos to unbundle service and equipment for landlines in the 1980s, but has been letting wireless carriers force this abusive policy on their customers. Given how there is a finite and limited amount of wireless spectrum, in exchange for their licenses, the carriers should not be allowed to effectively charge for phones after the subsidy has been paid off.

    • TallTony

      As of June 2012, I will likely no longer purchase a VZW handset at a subsidized price. Why? Because I have three smartphones in my family plan and they are still with unlimited data plans. If I get a subsidized handset on the next upgrade, that line loses its unlimited status. I did the math and with the amount of data we use (over 15 gigabytes combined) I’ll save at least $50 a month by purchasing handsets at full price. Saving $1,200 over a two-year period works for me. The savings will go a long way to “subsidizing” myself with $400.00 I can “apply” to each line when it’s time to upgrade. I’ll also be without a contract obligation….

      • Kevin Fitchard

        Hi TallTony,

        I was actually thinking of including VZ’s unofficial “unsubsidized” plan in the post. It’s definitely interesting how Verizon is using the lack of a phone subsidy to move people off unlimited, but for some folks like yourself there is still plenty of incentive to stay on. Do you get hit be VZ’s throttling policies though? It would seem a 5 GB a month per phone you would.

      • Lynne Gregg

        Right. And, I don’t think you factored in the cost of the early termination fee in the event you discontinued early. You’re way ahead using your plan.

  5. It definitely is a bad loan. More people should see and talk about it that way. More people should be educated about it this way.

    Here’s an iPhone 4S on contract, unlocked iPhone 4S and unlocked Galaxy Nexus cost of ownership comparison I did for a friend recently, for 2 years service (before taxes).

    iPhone 4S + AT&T contract
    = $199 + ($99.99 per month X 24 months)
    = $2598.79

    iPhone 4S Unlocked + prepaid Straight Talk 4G service
    = $649 + ($45 per month X 24 months)
    = $1729

    Galaxy Nexus Unlocked + prepaid Straight Talk 4G service
    = $349 + ($45 per month X 24 months)
    = $1429

    An unlocked iPhone 4S is costlier to own for 2 years by over $300 with taxes and an iPhone 4S with a 2-year contract is costlier to own by a over whopping $1169.76 with taxes!

    Incidentally, the new Galaxy Nexus with Jelly Bean is better than the iPhone 4S in every feature, including cost of ownership!