Blog Post

It’s official: handset “subsidies” are a bad deal

According to no less an authority than the Organisation for Economic Co-Operation and Development (OECD), so-called “subsidized handsets” don’t generally work out to be cheaper. Yes, that “free” phone you get when you sign up to a two-year contract isn’t actually free — I know, it’s like discovering Santa Claus doesn’t exist.

Cynicism aside, though, it’s nice to have some hard evidence that this is the case. Some upstart operators have previously characterized these subsidies as bad loans (the contract price simply goes up too much), and there is indeed already a growing trend in Europe for carriers to drop subsidies in favor of more transparent leasing and financing schemes. T-Mobile USA made a similar leap back in March.

These carriers have their own motives for doing so – it makes it easier to sell pay-as-you-go phones, for one thing – but the consumer also stands to benefit. The OECD study tells us why.

In a blog post on Thursday, Agustin Diaz-Pines of the organization’s Directorate for Science, Technology and Industry argued that “handset subsidy” is a misleading term that should be replaced by references to “bundling”. The OECD compared the total cost of ownership of a phone-plus-contract bundle with that of a separate device and contract:

“For those countries where both options exist, such as in France or the United States, the report concludes that the bundled option (with discounted smartphone) was, on average, between $10 and $20 a month more expensive than the BYOD option. Of course, these differences may depend on other aspects, such as the quality of the network or additional customer service. It is, however, of concern that these differences are not always made evident to consumers.”

The logic is simple: more transparency leads to more competition, which in turn sees more fat trimmed from consumers’ bills. The post also calls for more reasonable contract terms and the promotion of phone unlocking, as a way to help people switch when their provider is overcharging.

Interestingly, Diaz-Pines pointed out that the actual cost of the smartphone was a relatively small part of the total cost of ownership – between 6-24 percent, “depending on consumption patterns”. He praised operators in countries such as Australia and Italy for clearly marking in customers’ monthly bills how much is for the device and how much for the service. (You see the same thing happening in Germany and the UK now, too.)

The OECD isn’t saying bundling is a bad thing — in fact, it praises the simultaneous sale of devices and services for accelerating the proliferation of smartphones. It’s just saying the division of costs should be more transparent and people should be given more freedom to switch carrier. I can’t sum it up more succinctly than Diaz-Pines did: “At the end of the day, it’s all about competition and consumer empowerment.”

One Response to “It’s official: handset “subsidies” are a bad deal”

  1. I’m not really sure how you make these calculations. I could save money in the long run going with T-Mobile and BYOD, but the local coverage is not the same as Verizon. How do you value that?