Why the Mobile Phone 'Subsidy' is a Myth

There are no "subsidies." What carriers like AT&T, Sprint and Verizon call a "subsidy" is actually a very high-interest loan.
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You may have heard the news: T-Mobile announced a new mobile phone plan this week that involves no contract, and no phone subsidies.

What's most interesting about this news, and what nobody is talking about, is that other carriers don't have subsidies, either.

What is a subsidy?

The Merriam-Webster online dictionary defines a "subsidy" as "a grant or gift of money."

The word "subsidy" is usually associated with a government giving money to an industry or organization as a matter of policy.

The US government, for example, collects taxes from the public and then gives some of that money to specific industries in order to prop up and influence the direction of national energy supplies, infrastructure, food and so on.

In order for something to be considered a "subsidy," money must be transferred from one entity to another as both Merriam and Webster say as a "grant" or a "gift."

If you give me money, you're giving me a subsidy. If you give me money for now, but I have to give it back plus interest, that's a loan.

(Ironically, "telecommunications" is the third largest industry to get subsidies from the US government. That money comes from US taxpayers. That means if you pay taxes in the United States, you actually subsidize AT&T, Sprint and Verizon, not the other way around.)

Use of the word "subsidy" as it relates to an assumed discount when purchased with a carrier contract is a mis-use of that word, a euphemism, a misdirection, a lie.

Carriers give you loans, not subsidies

So let's be clear about your average mobile phone contract.

They claim their proposition is this: "If you sign a two-year contract for phone and data service with us, we'll pay for most of the cost of your smartphone."

But that’s just spin – conceptual packaging of costs designed to maximize what you’re willing to pay.

The truth is that they are not paying for most of the cost of your phone. Be assured that you are paying the full cost of that phone, and then some. The carriers are not going off and getting money from elsewhere and redirecting it to you. That would be a subsidy.

What they are in fact doing is selling you a phone and a plan at a price that fully covers the total cost of both the phone and the plan and also leaves a hefty pile of cash for them to keep as profit.

The contract is the legal requirement for you to pay for all that with monthly payments, plus penalty fees if you exceed the terms of the contract -- for example, if you exceed your "minutes."

Regarding the phone, they are giving you a loan. They're paying for the price of the phone up front, and then the repayment of that loan is built into your monthly payment, which you are required by contract to pay.

And that's the problem. The terms of the loan they give you is a rip-off.

When you buy into a "subsidized" phone with a two-year contract, some number of dollars you're paying each month is payment on that loan. Let's call it $20 per month, which is the amount T-Mobile charges per month for the repayment of their loans for iPhones after you pay $99 up front according to their new plan. (It's also the amount in a similar model outlined last week in the blog Phone Scoop.)

Because an average carrier contract has you paying typically about $200 up front for a high-end smartphone, we can assume that hypothetical $20 includes some interest. (An unlocked iPhone costs $649 from Apple. A "subsidized" phone from a carrier where, in our very conservative model, you're paying $20 per month in payments and interest on your loan works out to $680 -- the price of the phone, plus a total of $30 interest on the loan.)

If you immediately upgrade to a new phone after two years and sign a new, two-year contract, then you get another loan and the process continues.

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Tags: Android, iPhone, mobile apps, T-Mobile, mobile phone

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