Do you know how much your smartphone costs?

Thoughts on how the end of smartphone subsidies from carriers will change the market

Late last week, Verizon announced that it was ending its long-standing practice of offering substantial smartphone subsidies in exchange for a 2-year service contract. The move by the nation’s largest mobile carrier follows similar marketing approaches from much smaller competitors like T-Mobile and Sprint.

Even though I’ve been buying subsidized iPhones on 2-year contracts for almost 5 years now, I’m a big fan of this “new” approach—at least philosophically. Assuming that the dollars work out the same (not at all a safe assumption, unfortunately), I believe it’s better for everyone to understand the true prices of the devices they buy and the services they use.

And removing subsidies generally—though not always—makes it easier to see exactly what costs what.

Separating the cost of the phone from the cost of service

More importantly, separating the phone from the service gives buyers the option to make those purchase decisions independently of each other, choosing the best, most appropriate, deals on equipment and service for their needs.

It also means that buyers can change their minds whenever they want. Enticed by a cool new smartphone 6 months after you bought your old one? Go ahead and buy the shiny new toy (and sell or trade in the old busted junk, if you can get a price you like). Plagued with dropped calls or slow downloads from the carrier who enticed you with a great deal last month? No problem, just take your phone to another carrier.

Transparent competition will keep prices down, so you shouldn’t end up paying more than you already do, maybe less. That’s how it’s all supposed to work, anyway. And it actually does work that way in many other parts of the world, at least up to a point.

Changing the decision process

But make no mistake, the end of smartphone subsidies will make a big difference in how people choose the phones they use. For one thing, many smartphones are shockingly expensive. A fully tricked out iPhone 6 Plus costs a whopping $949! That’s more than many laptops, lots more than most tablets, and enough to buy yourself a really, really big TV, for example.

Sure, the carriers will be happy to let you pay off the phone in monthly installments (with interest), or even rent you one, but the ongoing unbundling of phones and service may help some consumers realize they don’t really want to spend $1,000 on a new smartphone.

Conversely, affluent technophiles may decide they want to upgrade every time the latest and greatest gets later and greater—no more missing a whole iPhone upgrade cycle just because you’re not eligible for a subsidy yet. A boon for cheaper models? More likely, though, revealing the real cost of these devices will push many buyers to look for lower-priced models, which could provide a boost for the Android ecosystem, or even other mobile operating systems like Tizen or Windows 10.

While the top Android smartphones are just about as spendy as the iPhone, there’s fierce competition—mostly among Chinese manufacturers—to make better and better devices available at lower and lower prices. Companies like Asus, Huawei, and Motorola sell credible machines for less than $200, and those prices may continue to fall.

In India, for example, Google is relaunching its Android One program, which is designed to stimulate creation of “good-quality” smartphones for less than $50. Don’t look for phones that cheap here in the United States any time soon, but you can bet the price competition will get much sharper as the real cost of these devices becomes apparent.

At the same time, one-upmanship on the high-end will become increasingly frenzied when smartphone makers have to convince people to pay almost $1,000 to upgrade their devices.

As a believer in openness and access to relevant information, I’m cautiously optimistic that this will result in lower prices and more rational consumer choices. But I wouldn’t bet the farm on it.

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