There's no such thing as a free phone

Offering free or subsidised phones with a contract is the purchasing model that most mobile networks promote, the alternative being to buy an unlocked phone and take out a SIM only contract with the network. As there is famously no such thing as a free lunch I thought I'd take a look at the economics of this situation in a bit more detail.

With the multitude of phones and contracts available it can be hard to make a fair comparison, and there is a school of thought that this is a deliberate strategy by the networks. For this example I've taken two top of the range phones: the 16GB iPhone 5S and the 16GB Galaxy S4, and the top tariff on the 3 network: The One Plan, as the control contract since this is available SIM only and with both of these phones as subsidised handsets*.

Comparison notes

As the subsidised phones are only available on 24 month contracts the figure we will be using for comparison is the initial cost of the phone plus the monthly contract cost multiplied by 24. This is what we will refer to as the total cost of ownership (TCO). The SIM only contract is available as a one month or 12 month contract with the longer contract having a lower monthly cost. As we are comparing against the 24 month contract we will use the 12 month contract.

The prices of the phones are for handsets that aren't locked to a network. The price for the iPhone 5S was taken from the Apple store and the price for the Galaxy S4 was taken from Amazon.

The advantage of an unlocked phone and a short contract is that you are free to shop around for a better deal from the networks which could lower the TCO over 24 months. However, as we're trying to provide a comparison controlled for the contract this isn't factored in.

Comparison

It is clear that the less you pay for the phone, the more you will pay over the course of two years. This is particularly noticeable for the 'free' iPhone 5S which will cost £311 more than buying the phone outright. If you still take the subsidised phone but do pay an upfront fee then either phone works out over £160 more expensive over two years.

Of course the downside of buying the phone outright is that upfront cost, getting a subsidised phone means you spread that cost over two years. If the upfront cost is a problem then it's still nearly £80 cheaper to put it on a credit card and pay it off at 16.9% APR over 24 months. By contrast, the £311 extra you pay for the 'free' iPhone works out at 25.2% APR.

Whilst it's not a top of the range phone like the iPhone 5S or the Galaxy S4, the 16 GB Nexus 4 is superb value for money with low upfront cost and a total cost of ownership nearly half that of the iPhone 5S.

Conculsion

Whilst the low up front cost of the subsidised phones may seem appealing at first it is worth checking how much you will actually be paying over the full term of the contract and comparing it to other options which will often be cheaper in the long term.

* Please don't take this as a recommendation for this network, tariff or these phones - just a means to get a fair comparison. The results are likely to be different for different phones, networks and tariffs and there may well be better deals than these available.