Your phone is probably a CDO

mobile money phone · 6 comments · 500 words · Viewed ~344 times.

I'm not sure how many people know this, but I thought I'd share something I learned a few years ago when I worked for a mobile phone seller.

Most modern smartphones are too expensive for people to purchase outright. At the most extreme end, the iPhone 14 Pro Max costs £1,200⁰. So a typical customer elects to pay £50 per month for 24 months.

The customer gets a new phone for a reasonable monthly figure. The phone seller gets a regular monthly payment which helps with their financial forecasting and cashflow.

But the seller has a problem. They have, effectively, loaned over a grand to the customer. And they've secured it against a rapidly depreciating asset which is easily stolen or broken. Most sellers don't offer different loan rates to different people. For a traditional loan, someone with poor credit might pay a higher %age than someone with a better credit rating. But, most sellers just give you a straight approve / deny for their loan¹.

This is where the Collateralised Debt Obligation comes in. You may remember CDOs from the Great Financial Crisis. They're fairly simple to understand. I am a high risk borrower and you are a low risk borrower - mix our loans together and you've got a medium risk debt.

Repeat that over thousands of phone loans. The seller has a pool of mixed risk loans which they can sell in bulk.

Here's a toy example - these figures are plucked out of thin air for illustrative purposes.

Buy 1,000 phones wholesale for £800 each.
Loan each customer £1,200 over 24 months to purchase the phone.
Sell the £1,200,000 debt for £900,000.
Immediate profit of £100,000.
Every month, send the £50 from each customer to the group which now owns the debt.
If fewer than 25% of the customers are bad debtors, the debt-owner still makes a profit.

Of course, it's a lot more complicated than that. And the margins are much slimmer. And there are various insurances, costs of chasing debt, ability to cut off service, etc. But hopefully you get the idea.

What does this mean for you?

If you've got a good credit rating, you're probably better off taking a personal loan to buy the expensive phone you lust over.

If you've got a bad credit rating, you're probably paying a lower rate than you would from a personal loan. But you might be better off saving up or buying a cheaper device.

Will this all come crashing down like the mortgage CDOs of yesteryear? Probably not. Phones are a lot cheaper than houses. For now...

The 1TB version costs £1,750!!! ↩︎
Of course, this means that people with good credit ratings end up subsidising those with poor credit. A weird form of socialism practised by capitalists, to be sure! ↩︎

6 thoughts on “Your phone is probably a CDO”

2023-06-20 11:40

Patrick Hadfield said on mastodon.scot:

@Edent of course! That makes complete sense. Fascinating how switching the perspective can illuminate things.

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2023-06-20 11:54

Simon Lucy said on mastodon.social:

@Edent I think part of this low margin fuels the need to sell replacement new models as a high proportion will be willing to have a new phone on a rolling over contract. The Phone Service vendors keep their higher margins and the Phone Manufacturers keep their own balls in the air.

And of course without new models it all grinds to a halt.

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2023-06-20 14:10

Alex B says:

...and those of us with excellent credit ratings are buying mid-range phones SIM-only for £200-300 cash and looking after them until they stop getting updates. How do you think we got that excellent credit rating in the first place?!?

2023-06-20 16:59

DinoNerd says:

This! Except I keep the phone until it's no longer usable, long after it's stopped getting updates.

Reply
1. 2023-06-21 14:07
  
  Alex B says:
  
  Don't tell anyone, DinoNerd, but I do too.
  
  I wouldn't recommend doing to for a general audience, though.
  
  For Android devices, even moving to LineageOS isn't a complete solution, as some of the device's unique features will probably stop working, and it's rare (in my experience) that the bootloader can be re-locked after LineageOS is installed, making it more vulnerable to physical access attacks.
  
  Reply

2023-06-20 17:16

David O'Brien said on mastodon.social:

When I started working in a design studio in the 90s you got 128 or 256MB storage on a Mac PowerPC.

Astonishing to think you can have 1TB on a device you can hold in the palm on your hand.

@Edent

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Your phone is probably a CDO