iPhone 5: How Cell Phone Companies Can Afford to Give You a $450 Discount

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Apple fans are in a frenzy over the new iPhone 5 and I would expect the same after any Apple iPhone announcement. During their presentation they annouced their prices of the phone, and in fine print told you that in order to get this price you must sign a new 2 year contract. This isn’t breaking news to anyone who has bought a smartphone in the last few years. However, to those who only buy phones when you upgrade your contract it may be a bit of an eye opener.

The iPhone 5, with a two year contract, has been subsidized by the phone carriers to be offered at $199 for the 16 GB model, $299 for the 32 GB model and $399 for the 64 GB model. What they don’t tell you in their release conference is that the true retail price of the phone is actually $649 for the 16 Gb, $749 for the 32 GB and $849 for the 64 GB. You could buy a Wifi and Cellular Data enabled iPad $20 less than iPhone 5 at each price point!

After assessing my personal situation and asking you, my readers, “should I get a smartphone?” I decided it was time for me to join the smartphone revolution. I actually called AT&T and got a Samsung Galaxy SII Skyrocket for free before the Samsung Galaxy SIII came out. There was a question nagging at me after the transaction…

How Can Cell Phone Carriers Give You a $450+ Discount?

The key to cell phone carriers being able to take such a huge $450 hit on the phone up front is that nasty two year contract agreement you sign (or simply agree to) without thinking twice about. As a part of most of these agreements you MUST have a data plan and, as many of you know, they aren’t cheap. I personally opted for a 3 GB plan that cost $30 a month and if I go over they charge me an extra $10 per GB. There was a cheaper option for 300 MB for $20 a month but if you go over it cost $20 for each extra 300 MB you need.

Worst case (for the cell phone carriers) you have signed up for $480 2 year data plan and they have you locked in with their service for two years. Cell phone carriers just barely made back the two year contract discount they gave you. Keep in mind though that many people do opt for the largers plans like I have. If you opt for the $30 package they rake in $720 over the length of your contract. In addition to that, some people exceed their monthly limits and pay a higher price for less data in overage charges.

What Did Cell Phone Carriers Do Before Smartphones?

Cell phone carriers often offered free phones before the smartphone was invented! The key is they weren’t nearly as expensive or complicated as today’s smartphones. Honestly, today’s smartphones are essentially handheld computers. Cell phone carriers built their cell phone discount into their base plan rates which, at the time, only included minutes. You know, back when people actually talked on their cell phones…

Will you be splurging for an iPhone 5 without a contract upgrades? Will you be waiting until you are elligible for a contract upgrade? Or will you be like me and not get an iPhone? Let me know down below!

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.

Comments

  1. It’s disgusting how much people spend on the actual cell phone and how much they throw away for the 2-year plans. It’s insane.

    • I don’t consider it being thrown away. I buy back my time by filling up little dead spots with blogging tasks so I don’t have to do them all in my evenings!

  2. I’m not a fan of Apple products, so I won’t be getting an iPhone5. I did have an ipod back in the day, but I never got into macbooks and like pcs a lot better. Now that I’ve been using a Droid phone for the past year and a half, I couldn’t imagine switching to Apple.

    • DC I love to hear someone else saying that on a finance blog. Besides my old ipod, I haven’t bought another Apple product since. I just find it unnecessary to pay inflated prices just to cover all of their advertising. When I finally upgrade to a smartphone, it will almost certainly be Android based.

      As for cell phone carriers affording $450 discounts, so many industries have given customers freebies for signing up for long term customers. In the case of cell phones, it is just such a profitable industry. All of their infrastructure is in place. So it doesn’t really cost them anything extra for them to let you use their network. They know that you’ll most likely stick with them once your contract is up too.

      • Right now they’re spending a ton of money building out the 4G LTE networks but as long as this sticks as the newest technology for a while they will get back in that spot.

    • I like my Samsung phone as well. I do own an iPod classic from college but that is the only Apple product I own.

  3. I am not die for an upgrade until June 2013 and I will be waiting until then

  4. I’ll probably just keep on using my prepaid. The day they do away with contracts is the day I’ll buy a smart phone – which is probably never. Meh, I can live without it.

  5. We splurged and got two iPads recently. We hardly ever use the phones any more for anything but talking (I know, novel idea) and the occasional text message or email.

    Super fancy smart phones that cost just as much as a tablet make no sense to me any more. We’ll probably hang on to our smartphones as long as they last and then replace them with old school phones, using the tablets and laptops for computer work. (We have a pooled data plan.) As a computer for work, most smartphones are little more than a novelty.

  6. I don’t have a smart phone or an ipad and probably wouldn’t have time to learn to use one if I did. When we have no credit card debt and have our rental rented, maybe we’ll think about it.

  7. Our contracts are coming due in January. I am sure my wife is going to want the new iPhone as she loves Apple products. I on the other hand love my Droid, so I’ll be opting not to get the iPhone.

  8. No, for now! Perhaps eventually I will succumb to it.

  9. The cell phone companies can’t afford that subsidy, but if they don’t play they lose subscribers. Look at Sprint who was so desperate for the Iphone that they guaranteed purchasing 10 million Iphones from Apple. Tmobile is losing a lot of customers due to a lack of Iphone, although they will be getting the 5.

    We all end up subsidizing the Iphone, the carriers make it back on Non Apple users. I have Verizon and since they got the IPhone they stopped giving away free low end phones with a contract, you have to pay at least $60 now. They did away with the free phone in two years subsidy where you would get a $250 credit which makes your smartphone fee. Essentially Droid users (which I have) ends up subsidizing Apple users.

    • This has been a problem lately but I assume once the initial launch Apple cuts the carriers a bit of slack… at least I’d hope. Then again, they are Apple…

  10. I have always been SO curious as to how those deep discounts (or freebies) are possible. Thanks for breaking it down. And now for a stupid question… does a data plan include minutes and text messaging? (I don’t have a smartphone, so I don’t have a clue!)

    • Nope, unfortunately those are extra (basically you keep your current plan and pay extra for the data). Now you can get an app called Text Plus that gives you a free phone number people can text. It does take up a little bit of your data but it saves you your normal texting part of your bill.

  11. I don’t have any Apple products. I have nothing against them, and I would consider and an Iphone if I didn’t have to opt out of my current plan. However, I have a VERY HEAVILY discounted plan for my smartphones and get sticker sticker shock every time I even think about upgrading to an Apple or comparable smartphone.

    • I did consider the iPhone 4/4S vs the Samsung phones when I decided to upgrade but the 4/4S were soooo tiny compared to the Samsung SII Galaxy Skyrocket.

  12. I have an iPhone 4 and I was pretty disappointed with the 5. I don’t think I’ll be getting one as of now. I really prefer the look of the iphone’s over any other phone, and since I jailbroke my phone, it works just like an android phone except I can’t add more memory which really pisses me off! How could anyone pay an extra $100 for 16 gb of memory? I can get that at best buy for like $8! haha

  13. Monroe on a Budget says:

    Actually, we came out ahead with all this updating / switching.

    We signed a new family plan with the purchase of two iPhone 5 devices and one iPhone 4s. The upfront cost was cheaper than we expected even for model 5, and our old phones can be sent in for trade-in reimbursement beyond that.

    Our new phone contract will also cost one-third less than the one we had before. That contract expired three months ago; but we intended to change carriers so it made sense to see what happened with the new phones while we looked into service areas. The fact that the cost was noticeably less, and we are less likely to hit overage, was a bonus.

  14. I have a friend that works for AT&T and another that has owned a cellphone store for over 30 years. This model is nothing new and is a way to get customers to commit to long term contracts because there is a discount for doing so. The original reason the cell phone carriers to adopt this kind of model was because the cellphone equipment was so expensive and the average person couldn’t pay for a phone out right. In order for them to succeed, they needed to find a way of making the phone less expensive so that everyone that wanted one could afford to get one.

    As far as the iphone 5 goes, I’m a gadget freak a love to have the latest technology. This is one the only place that I have allowed myself to splurge. ;) As luck would have it, I was able to pick up my iPhone 5 in store on the day of release. If it weren’t for a delivery of phones for the next day, being delivered early, I would have missed out. I have been using the phone since then and I absolutely love it. Great Job Apple! Keep up the good work. ;)

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