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The Bottom Line: Smartphone subsidies

Updated: Thursday, September 18 2014, 08:03 PM EDT
CLIFTON PARK -- If you've gone to buy a new smartphone in the last year or so, you may have noticed a change in how you pay for it.

You now have the option to pay more money up front for the phone, while paying less money for the service, and potentially with no contract.

That's because some wireless providers are doing away with smartphone subsidies.

What that means? 

For years, providers subsidized their smartphones to attract users.  For example, for an iPhone, you would've paid $199 instead of the full retail $650 - if you signed a contract and agreed to pay $80 a month for the duration of your service.

Now, with some providers doing away with the subsidies, you would instead pay the full $650 up front for the phone - but you wouldn't be tied down to any contract or phone, so you could upgrade your phone more often and look around for cheaper service.

What's it boil down to in dollars and cents?

Take the Samsung Galaxy 5S.  At Verizon Wireless, if you buy it subsidized with a 2-year contract, the phone costs $199.99.  Buy it unsubsidized, and it costs $599.99.

If you want a 2-gigabyte plan for your service, with the 2-year contract, it's $75 a month.  That totals $1,800 over the two years for service.

That same plan for the unsubsidized phone would be $60 a month.  Over those same two years, it would total $1,560.

The total cost side by side for both the phone and the service has the subsidized phone saving you $220.

But experts tell CBS 6's Dori Marlin, those savings are only on the surface.

"People buy the phone, then they start watching what they're paying each month, because then they can change their plan," says Dr. Sanjay Putrebu, UAlbany Marketing Professor. "You can do things without worrying if [you're] breaking the contract."

Since you have the freedom to take your unsubsidized phone to another carrier at any time, you can shop around to find higher savings in the long run.

So who wins:  The companies, or the consumers?

"Purely from a financial point of view, yes, consumers will be better off buying the phone outright and then going with a non-contract plan," Dr. Putrebu says.

"I think in the end, the consumer will win," technology expert Don Reisinger tells Dori. "The hopeful goal here is that ultimately we're going to have more choice, prices will start to come down because the companies want to compete a little more effectively on price, and we get more for our service."

Reisinger also tells Dori, consumers have a lot of leverage today - both in terms of getting out of contracts, and getting away from fees.

His advice?  Use that to your advantage, since he says providers right now need to keep you as a customer more than ever - or else they lose power in the marketplace.
The Bottom Line: Smartphone subsidies


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