There's been a little bit of confusion in the blogosphere recently about the true cost of smartphones. Ewan Spence points out that the iPhone actually costs $2,000. An instant response by Bill Palmer points out that Nokia's Windows 8 smartphones cost $2,500.
The US and European markets are radically different in how they operate and advertise. The US tends to advertise phones as being "Only $10 upfront!" whereas the UK tends to advertise as "Only £20 per month!"
With a range of subsidies, price plans, discounts which only last a few months, and multi-year contracts, it can be very confusing to try and work out the Total Cost of Ownership (TCO).
So, here's the way I look at it.
I recently bought the Samsung Galaxy Note II. I think it's the first phone I've purchased with my own money since starting in the mobile industry - so I was fairly keen to work this out correctly.
I'll be looking at O2 (I work for Telefonica, these thoughts are my own, etc) although other telcos offer the same basic pricing strategy. This just looks at the cost for hardware and a contract. It doesn't take into account that companies also make some money selling apps and music tied to their phones.
With the Galaxy Note II the costs (today) are (for unlimited calls & texts + 1GB data)
£245 for the phone + £26 per month for 24 months = £874 TCO
Or, if you'd rather have a lower upfront cost
£129.99 + £31*24 = £874
As you can see, the TCO is exactly the same. You save on the initial cost, but pay extra every month. Depending on your finances one may be preferable to the other.
Make the upfront cost cheaper still.
£100 + £36*24 = £964
Bang! That's where the first hit comes. Save £30 up front, pay an extra £90 overall!
Want the phone for free?
£Free + £41*24 = £984.
A "free" phone ends up costing you £110 more.
For an 18 month contract, the price jumps again.
£199.99 + £56*18 = £1,208
£Free + £72*18 = £1,296
Gulp! That's pretty much $2,000 for a top of the line Android phone. Telcos want you to stay with them - a short contract bumps the price considerably. If you carried on paying the monthly amount for a further 6 months and decided to keep the same phone - you'd end up paying double the cost of taking out a 24 month contract with an upfront phone cost.
Ok, but do those pricing schemes mean that you are paying over the odds?
The handset only price from O2 is £480 (it's cheaper from third party websites).
The SIM only price is £20 per month (for 12 months) for the same tariff (unlimited calls & texts + 1GB data).
£480 + £20*12 = £720
That's a considerable saving over taking out a contract! And you're only tied in for a year. Then you can change tariff or phone.
Of course, we need to compare over the same time period.
£480 + £20*24 = £960
There, it seems, it's slightly more expensive over two years - about £3.60 per month to get the flexibility of changing both phone and contract. Of course, if you don't need billions of minutes and texts, you can drop the costs considerably.
A 300 minute plan (because who talks on their phone anymore?!) with unlimited texts and 100MB or 500MB of data will cost £13.50 or £16.50.
£480 + £13.50*24 = £804
£480 + £16.50*24 = £876
If you need a top line calls/text/data package, it just about makes financial sense to take out a contract. If you favour flexibility, or want to save money, it's usually as cheap to buy the phone and contract separately.
The price range for a top end phone on an top end contract over 24 months is £874 to £1,296 ($1,400 - $2,100). You can end up paying £422 extra ($680) for exactly the same phone and contract.
That's roughly a staggering 40% APR! If you were to borrow the £874 at the start of the contract, you'd have to find a really dodgy loan company to give you rates that high. Short term low value loans at the moment range from 5% to 10% at most reputable financial institutions.
If you don't use all your minutes and data allowance, the worst case scenario premium is £492 (that's £1296 - £804). An "interest rate" of 50% per year.
The "real" cost of a smartphone depends entirely on how financially astute you are - and if you can afford the upfront cost. If not, prepare to pay the price.