When you buy a cellphone — an iPhone or Android phone, let’s say — you pay $200. Now, the real price for that sophisticated piece of electronics is around $600. But Verizon, AT&T and Sprint are very thoughtful. They subsidize the phone. Your $200 is a down payment. You pay off the remaining $400 over the course of your two-year contract.
It’s just like buying a house or a car: you put some cash down and pay the rest in installments. Right?
Wrong. Here’s the difference: Once you’ve finished paying off your handset, your monthly bill doesn’t go down. You keep reimbursing the cellphone company as though you still owed it. Forever.
And speaking of the two-year contract, why aren’t you outraged about that? What other service in modern life locks you in for two years? Home phone service? Cable TV service? Internet? Magazine subscriptions? Baby sitter? Lawn maintenance? In any other industry, you can switch to a rival if you ever become unhappy. Companies have to work for your loyalty.
But not in the cellphone industry. If you try to leave your cellphone carrier before two years are up, you’re slapped with a penalty of hundreds of dollars.
This is why T-Mobile’s recent shift to no contracts, phone subsidies, etc. is kind of a big deal. It’s basically bringing the same model the rest of the world uses to America — except without the affordable plans.