It’s The Rate Plan, Stupid
“I really want that new Galaxy [S III],” a friend recently told me, “but I can’t afford it.”
Around the same time, another acquaintance serendipitously tweeted the following: “Someone should really do something to educate American consumers about device cost vs. plan cost.”
Not one to ignore the power of serendipity, I decided I’d take a whack at it.
The recent bump in the average cost of high-end smartphones has been tough to ignore. Led by Motorola’s DROID RAZR line and Samsung’s Galaxy S device family, price tags next to top-shelf devices have inflated by $50-$100 over the past year in some carrier stores. Variable storage options make such broad generalizations a little tougher -high-capacity iPhones, for example, have always cost much more than their lower-tier cousins- but I remember being torn between the Galaxy Nexus LTE and the Motorola Droid RAZR at the Verizon store when I visited last January; both of the then-new phones were priced at $299.99, with no cheaper options available.
That’s with a contract, by the way. Those who live outside the U.S. may be unfamiliar with the American approach to wireless pricing, and even some American friends of mine seem befuddled by the contract paradigm, convoluted as it is. Non-U.S. readers may also raise an eyebrow at this piece’s headline, so I should say right here that I’m not calling anyone “stupid.” I just couldn’t resist the urge to paraphrase the mid-90s Clinton administration election catchphrase.
Anyway, in brief: wireless carriers in the U.S. buy phones from the manufacturers at something (relatively) close to the full retail price. They then sell these phones at a loss to you, the consumer, hoping to make up the difference in monthly plan revenue. That’s why year-long and two-year contract terms exist; the carrier needs to make sure you stick around long enough to make up for the loss on the subsidy.
It’s also the reason for multiple values on device price tags: one is the full retail price, one is the two-year contract price, and sometimes a third entry calls out the one-year term price, if the carrier offers those.
The thing is, no matter which price you decide to look at, your focus is heavily biased toward the wrong side of the equation. We’re doing it wrong, fellow consumers!
But it’s okay; it’s not our fault.
We’ve been trained, by years of exposure to traditional retail environments, to focus on the price tag. We pay (this cost), and we receive (this product). But in the American cellular world (and in some other countries’), it doesn’t work that way. Sure, we lay down some bucks and we receive a device, but we also choose a rate plan and sign a contract, typically for two years.
That rate plan isn’t cheap. The add-ons aren’t, either. And over the course of a two-year contract term, the dollars add up. I’ve whipped up a generic chart showing rough pricing for a rate plan with add-ons typical to the kind of user who’d be buying a high-end smartphone:
That $2,400 is nothing to sneeze at. Now, if we add the typical high-end device cost -$300- to that figure and do some simple math, we find that the phone itself only makes up 11% of the total package. Almost 90% of the money leaving a subscriber’s pocket over two years goes to pay for carrier services.
There’s nothing wrong with that; it’s an unconventional means of doing business, but it’s not crooked or deceptive (unless we start talking about early-termination or other “fees”). It also means we get to snap up the newest and hottest devices for substantially reduced prices, which is a big deal. I liked the Samsung Galaxy S III, but I didn’t like it enough to pay $650 for it.
I’m not saying people shouldn’t make smart decisions when breaking out the checkbook. Nor am I suggesting that everyone should throw reason to the wind and go buy Vertus because device cost is irrelevant. For many people, the extra $100 or $150 that a Galaxy S III demands versus a Galaxy Nexus isn’t a trivial concern. That’s fine.
But the strange, serpentine path of dollars in the wireless world does mean we often forget to ask the important questions at the retail counter. It causes us to balk at high device prices, while at the same time we sign up for a rate plan whose total cost amounts to that of a good used car. If we gave as much thought to rate plan pricing as the price tags on our phones, we’d find excellent ways of recouping that extra Benjamin over the long term. Apps that offer alternatives to SMS are great for that; on average, I save almost $500 over a two-year contract term by using Google Voice for texting.
There are other means by which to reduce our monthly wireless bill, but that’s for another article. In the meantime, it’s sufficient that we shift our focus at the retail store. Instead of keeping our attention myopically riveted on the device price tag, we need to consider everything we’re signing up for. Only then can we make a decision about whether we really need to forego that new, hot smartphone for a cheaper, last-generation substitute.
For her part, my Galaxy-wanting friend ended up splurging a little: despite her concerns, she bought a Galaxy S III shortly after the conversation that kicked off this article. Whatever monthly fee she’s paying for the privilege, I’m quite sure she’s going to be happier with the SGS3 for two years than she would have been with a cheaper, older device. So I’m chalking that one up as a win for reason, for forethought, and for not being “stupid.”