Maximize your phone subsidy and savings

Warner let us know he’s tired of the games the phone companies play with us on subsidies and pricing. Can’t blame him for that, however, I have only started playing. My first phone was not from a big carrier, and I switched to my iPhone 3G just last year. Thus, I’m still up for playing the game and tweaking the system for maximum savings. First round: subsidies.

Generally, for a two-year contract, U.S. carriers will give you a fixed subsidy per year. In the case of the iPhone and other smartphones with data plans, that subsidy is $200 per year. You sign up for two years, they give you a $400 subsidy. You try to re-up a year early, you only get a $200 subsidy. Seems fair enough to me, but why settle for fair?

As is being widely reported, AT&T lets you have the full $400 subsidy if you re-up after 18 months, giving you a six month re-up period ahead of your contract expiration. Pretty standard, though not explicit, practice among U.S. carriers. So how does that affect you? Check out the table.

phone_subsidyBased on a six-year span of purchasing a new phone at set intervals, starting with the full subsidy when you first sign up, the total subsidy you receive is the same whether you re-up every year or every two years.

But if you re-up every 1.5 years, you sneak in an extra phone subsidy. You do pay a bit more vs. two years, but you get 25% more subsidy vs. 20% higher cost and you get one more phone to sell or re-purpose.

Now look at the huge price jump if you re-up every year. Re-up annually and you get the same total subsidy as re-upping every two years, but it can cost several times the price. Definitely not worth it.

There are other costs to consider of course, such as upgrade fees and taxes, but in general over the long-term, an 18-month upgrade cycle gives you a larger subsidy at a slightly higher total cost.

Second round: last year’s model. Also notice the $100 phone is half the price of the $200 phone while the subsidy totals are the same. Due to that fixed subsidy, the relative savings is much higher for the $100 phone vs. the $200 phone. Seems unfair to compare, but remember, the 8GB iPhone 3G that will be offered at $99 used to cost $199. Same phone now half the price.

Assuming Apple keeps to their annual schedule, we can expect to see the 16GB iPhone 3GS, currently $199, available next year for $99. True, there will also be a hotter, newer iPhone model out, but if your goal is to save money, the cutting edge is not the zone for you. The cycle is based on the current iPhone schedule, but I would expect its key competitors, such as the G1 and Palm Pre, to maintain a similar pace.

So there you go: re-up every 18 months and settle for last year’s model to maximize your subsidy and get the most phone for your buck. Again, this is just a general breakdown. Other costs apply, but I bet more tweaks can be found too. Feel free to share in the comments.

Update (6/9/2009 2:14PM ET): Reader Jonathan has reminded us of a fun twist on the game: cancel and renew. Basically, if you cancel your contract and pay the $175 early termination fee with a $5 discount per month for “time served”, which works to $115 at 12 months, then sign up new, you get a better deal than a straight upgrade. I have created an updated table to reflect this, as well as include the $18 upgrade fee vs. $36 new activation fee. As you can see, this nets you a bigger subsidy, though at a less favorable rate compared to 18 month upgrades. And yes, it is dumb that they don’t just give you a better option than this at the get-go.

phone_subsidy2

13 Comments

  1. Xavier Lanier

    06/09/2009 at 10:52 am

    Thanks for posting the chart. You failed to calculate one important component though:
    iPhone EDGE owners that didn’t upgrade to iPhone 3G missed out on all the dropped calls and poor data coverage :-)

    Reply

  2. Warner Crocker

    06/09/2009 at 11:12 am

    Great post, Sumocat.

    Reply

  3. Jonathan

    06/09/2009 at 11:32 am

    I had a thought yesterday and I want to see if there is some flaw in my logic.

    AT&T’s Eerly Termination Fee is $175.
    Their subsidy for a new iPhone contract is $400.
    Their subsidy for an upgrade iPhone contract is $200.

    Both situations result in you adding 2 years to your current contract.

    Also to factor in, AT&T reduces your ETF by $5 for every month of your contract you’ve completed.

    So my thoughts.
    I’ve had my iPhone 3g for a year.
    Option 1) Re-up my contract for 2 years and get an iPhone 3GS for $400.
    Total Cost $400
    Option 2) Cancel my account. Pay $115 ($175 – 12*$5) ETF. Get new 2 year contract with an iPhone 3GS for $200.
    Total Cost $315.

    Also worth considering, I assume there is a $30 upgrade fee with option 1, and I also believe you don’t pay sales tax on the ETF but you will the whole phone price meaning theoretically, in MD with a 6% sales tax it would look like this
    Option 1) New Phone $400 + sales tax $24 (0.06 * $400) + Upgrade fee $30.
    Total $454
    Option 2) New contact $200 + sales tax $12 + ETF $115
    Total $327

    Meaning you save $127 by canceling your contract. This makes absolutely no sense to me. Am I missing something?

    Also, I haven’t been keeping up with this, but I thought they usually only subsidize phones $100 a year, not $200 a year, and the iPhone is an exception (I doubt it costs that much, I think they just don’t want anyone with it without a profitble contract). Otherwise their Early Termination Fee makes no sense at $175 since it would be cheaper to cancel your contract a month in and pay the fee to get a new iPhone than to pay the upgrade price.

    Reply

  4. NumberGarage

    06/09/2009 at 11:38 am

    Very thorough. I was searching for some good data yesterday and eventually found it. However, you do a great job of breaking down the total cost of ownership or contract, which many fail to think about. We live in such a “now” culture don’t we?

    Reply

  5. Sumocat

    06/09/2009 at 11:38 am

    Xavier: Eh, table only works on a stable, established system anyway. If I had to calculate the early service woes of the 3G, not to mention the wild pricing of the first iPhone, it’d be sliced up like crazy.

    Warner: Thanks. Honestly, I get why you and others would and rightfully should be fed up with the games, but I say if the game’s not fair, cheat. I mean, play smarter.

    Reply

  6. Xavier

    06/09/2009 at 12:02 pm

    j/k Sumocat. Great job on the tables and good recommendations for people looking to save $ vs. having newest iPhone.

    Reply

  7. Sumocat

    06/09/2009 at 12:03 pm

    Jonathan: That’s about right. The upgrade fee is actually $18 and new activation fee is $36, so straight upgrade is $418 vs. cancel/renew of $336, not counting taxes. It is silly, but part of that is due to changes in the way early termination fees work, which used to be fixed. It was deemed unfair, so a “time served” system was introduced. The rest of the system has yet to catch up. Good way to play it. I think I’ll need a bigger table.
    Edit: Sorry, cancel/renew is $351. $200 phone + $115 ETF + $36 upgrade.

    Reply

  8. Jonathan

    06/09/2009 at 12:11 pm

    I’m just wondering what this would do to AT&T if people realized it. It sounds like it would be a service nightmare if everyone that wanted a new phone decided to cancel their contract and pay the ETF just to come back for a new contact.

    I bet they would change their policy right quick and give a more reasonable upgrade fee for the iPhone.

    Oh, and this should not count in the calculations, but I’ve generally been able to get the activation fee waived by calling CS and saying they didn’t tell me about it (the sales rep told me to do this). I can’t recall if I’ve succeeded with that on upgrade fees.

    Reply

  9. Sumocat

    06/09/2009 at 12:27 pm

    Jonathan: I added a new table based on your analysis. And yes, the carriers should just offer this pricing for upgrades from the start instead of playing their pricing games. It’s like being on The Price is Right except they want you to lose.

    Reply

  10. Regular Reader

    06/09/2009 at 1:00 pm

    Be aware that every time you open a new account with a wireless company they check your credit. On your credit report this is listed as an “inquiry.” One marginal inquiry can lower your credit score by 30 or more points which can take you from the top 5% to the top 35% of the population. Why do you care? Because car insurance and homeowners’ insurance rates are tied to credit scores, not to mention the interest rate on a loan if you actually borrow money.

    Reply

  11. Jose R. Ortiz

    06/09/2009 at 2:06 pm

    i still don’t understand what i am getting for the $18 “upgrade” fee since the service is the same; unless that is the charge for the rep to swap the sim card from one phone to another.

    Reply

  12. Jess

    06/09/2009 at 5:33 pm

    I feel that people should just know that if they are still in contract from the original iPhone 3G they should expect to pay the normal price for the new iPhone.
    http://www.newsy.com/videos/at_t_crashes_iphone_party

    Reply

  13. Dan Meyers

    06/09/2009 at 8:17 pm

    While cancel and renew might be cheapest { especially since older contracts I think have $25 per month dropping of cancellation fee… }, found interesting posting on ebay:

    http://toledo.craigslist.org/ele/1213501754.html

    Basically, person is looking for person who is going to purchase the $99 iphone, he will pay the $199 gs and give the customer his 16GB phone. New customer get free iphone, and old customer gets the gs for 199.

    Reply

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