Smartphone TCO & How Carriers Make Money

I started this article to bring awareness of a smartphone’s TCO, or total cost of ownership.  As I wrote this article, I discovered that quite like banks and all of the fees they charge, many cell carriers make a GREAT deal of money based on consumer ignorance, or more appropriately put, a consumer’s lack of knowledge of the contract terms they agreed to when they signed up and bought a phone.

There’s a lot here, and much that everyone needs to understand in order to keep your checking account in the black (instead of your carrier’s…) so please, read everything carefully and remember that all of the prices and costs here relate to either monthly costs of individual based voice/ data plans and one specific cell phone (my Nexus One).  The numbers will vary somewhat based on the costs (subsidized and unsubsidized) of YOUR phone.

Smartphones. They are EVERYWHERE..

The iPhone, Droid/DroidX/Droid 2, Nexus One, HTC HD2, Samsung Vibrant/Galaxy S, or Sprint EVO and Epic. I walk the streets of Chicago from the Lake Front to Union Station twice a day, and nearly everyone has their nose in their phone. Its truly amazing, as it seems that everyone, everywhere is now addicted. Crackberries be damned!

I saw an interesting article on MSNBC recently, and wanted to comment on and add  a few things. The author, Wilson Rothman, is dead on right about the major push of his article – the cost of your smartphone doesn’t mean squat compared to the Total Cost of Ownership (or TCO) of the device over the life of your wireless carrier contract. 

While its certainly something to consider in today’s budget conscious/expense leery and fragile economy, I think many cell and smartphone consumers are missing one important point – Cell phone carriers aren’t making money on voice plans, unless you don’t use all of the minutes you purchased, and then on AT&T, that doesn’t mean much due to their Roll Over Minutes.

Fees.

Minute overage fees. Data overage fees. Service fees (411, road side assistance, GPS, etc.).

At the end of the day, unless a specific service is provided, and you actually USE the service (like 411 or GPS), your carrier pockets that money and it floats right to the bottom line in the, "free money ‘cuz we imposed a policy or they didn’t use what they bought," column.

So, let’s take a quick look at the base cell plans that all of the carriers are providing, and see how your TCO fares and where the carriers are really making their money.

Consider the chart below.

Wilson’s article basically lays out the above costs for service on all four major wireless carriers. You’re left to do the math (though he does a great job of adding things up for you). This however, is not the end of the story.

What is?  Great question. Here’s the answer – Overage and other charges, and of course, the cost of the device…

Thinking Holistically
With Verizon’s data plan, you can’t get charged any overage fees for excessive bandwidth.  It is truly the only unlimited data plan left. From a data plan perspective, this is the best and most cost effective data plan available.

While Sprint and T-Mobile call their data plans unlimited, they cap out at 5GB. If you use more data than that, you risk either getting funneled to a slower network segment or up to, and including, having your account cancelled.  Honestly, I’ve pushed and pulled a LOT of data. I’ve hit as high as 3.5GB in month, but I’ve never come near 5GB. At most you need to be careful on these networks. Getting stuck on a throttled network segment can suck, and depending on where you are in your billing cycle, the end of the month doesn’t mean the 1st.

On AT&T, if you have the 200MB plan and you go over 200MB (say 200.01MB) your data charges of $15 are doubled to $30.  I’m not sure what happens if you go over 400MB; but they will likely hit your for an additional $15 bucks that month. 

This is, by the way, the WORST data plan I’ve ever seen for a smartphone. If you do ANYTHING on your smartphone other than make calls and send text messages (though they are DATA, everyone charges for them, separately), I can guarantee that you are going to use more than 200MB of data in a month.  You’re going to come close to that with just simple data syncs when the device turns on and off, let alone e-mail and web surfing (or FB/Twitter/MySpace status updates).  Buying this data plan is a huge mistake. If you are on AT&T and have this plan, don’t be surprised when you get hit with additional fees. You have no one to blame but yourself.

Ok… so how do you think holistically?  Easy.  Add in the cost of the device, the full price, not the subsidized price to the 24 month voice and data plan costs above, and then divide by 24; but… the results can be somewhat subjective.

I use T-Mobile and have a Nexus One.  My costs are also slightly different, as I have an Unlimited Voice plan for $99 per month. To refresh your memory, here is the T-Mo data again; and my TCO related costs are at the bottom:

My Monthly Costs without any taxes or fees

Now, this is where things start to get a little interesting. Most people don’t have the huge down stroke needed to purchase a device without a contract, so the carrier allows you to "save" some money by agreeing to a contract. Everyone knows that… You get a reduced price on the phone you want, and your carrier locks you in to 24 months of service.  Below are my actual costs.

My costs for my current cell service without any taxes or fees

Now, check this out – If you subtract the unsubsidized cost from the subsidized cost and then multiply that times 24 (the life of the service contract) you get $349.92.

The cost of subsidizing the phone over the life of your contract

Keep that number in mind.  Its a very interesting number.  Why?  Simple.  I paid $180 for my Nexus One – a savings of $350 over the unsubsidized cost of the phone.

I actually come out ahead over 24 months

Based on my plan (actually part of a family plan…) I actually come out ahead $1.92 (or $0.08 cents a month) over the life of the contract. So, if I actually come out ahead on the deal, how is T-Mobile making any money?  Easy – fees. Every 411 Call costs me $1.79 per instance. With the way my wife and daughter use that, I regularly give T-Mobile an extra $30-$40 a month, or an extra $480 a year.

Let’s go back to our minimal plan example above. If you have a 500 minute plan, and used 743 minutes, used 411 5 times (with it texting you the number so you could copy it into your contact list for next time), Caller Tunes (callers listen to music instead of ring-ring) at $1.49/month, and downloaded 5 ring tones, 2 applications and 5 wallpapers, you would have incurred the following additional charges on T-Mobile:

The monthly bill (minus taxes, regulatory fees and other required charges) for the T-Mobile example above is $80 per month.  If you incurred the noted charges, which isn’t all too difficult if you think about it, then your bill is nearly 3 times its normal amount. Now, think if nearly every person with that carrier did something like that every month.

Cha-ching.

Honestly, what killed the example above is obviously the overage minutes.  However, at nearly $30, the extras I cited are nearly half the normal bill. This is the carrier’s dirty little secret. Overage charges, extra services – charges and fees that you don’t necessarily see when you signed up. 

What’s worse, is that even if you’re really careful, you can STILL run into unexpected charges.

So… obvious question – how do you stop the unexpected charges?  Good question.  Here’s what I’ve figured out.

1. Read your Bill
   The more you understand it, the easier it will be for you to see the little added extras and gotchas that can creep in when you aren’t careful. Understand what the taxes come out to. Understand what regulatory (and other required) fees you’re obligated to pay.  These aren’t part of your variable bill.  They’re usually constant.
2. Find the Right Data Plan
   Since the iPhone 3G, all smartphones now require a data plan. If you get ANY e-mail on your device at all…If you surf the web even a little bit, AT&T’s 200MB plan is NOT what you want. You’re going to get hit with an overage charge, and then your bill grows. Smartphones are more about data than calls. Get the right data plan on your carrier for your data needs and you’ll save money and headaches.
3. Find the Right Voice Plan
   If you talk on your phone at all (and I don’t know many who have a smartphone and don’t use it for calls…) then you need to take some time and really think about how you’re going to use its voice features too. If you plan to ditch your land line in favor of your cell phone, sticking to the 450 minute/500 minute plan may not be for you.  At $0.45 cents per minute over the allowance, 243 extra minutes cost $109.35, at least as much as minimum monthly charge for the plan WITH data and messaging, and then some. Get the right voice plan for your needs and then use those minutes but don’t go over. If you’re on AT&T and have roll-over minutes, then you’re ok, but you need to find some time to use those too… You DID pay for them.
4. Enough with the Downloads Already
   All smartphones come with a USB cable and the ability to connect to your PC or Mac.  If you want ring tones, make your own.  You can rip your CD’s and use tools like Audacity to cut the tracks into the segments you want for your ringtones. I do it all the time.

   Wallpapers can be found on the internet, many for free, and you can use the free tools that came with your PC to edit them and make them the right size for your phone’s screen.

   The iTunes App Store, the Android Market and all the other application stores have TONS of free applications.  The only thing you need to be careful of is the quality of the app. Don’t use crappy apps.  Hunt around, try some, uninstall those you don’t like or want and keep the ones you do.  Free is good.

   Caller Tunes…really?  REALLY?  Look, ring-ring has been good for more than 100 years.  I’m not gonna die listening to ring-ring. I don’t need to hear the latest tune from <pick your favorite artist> while I wait for you to pick up or get tossed into your voice mail. I’ll live… really.

5. Directory Assistance
   When you’re driving and have a hands free kit, and really need a number, directory assistance can be a big help. If, however, you can pull over; or have another person in the car, most smartphones and their location services can find businesses around you.  In that case, Google Maps (available on most smartphone platforms) can do the trick. It can find what you’re looking for and give you the phone number, address and even directions to the destination… AND guess what..? Its free.  Please stop with the 411 calls… you’re killing me.

So, what have we learned?  Let’s briefly review –

• Managing your bill means understanding it and what is on it. You’re going to get hit with things you weren’t expecting if you don’t watch out.
• Wireless Carriers don’t make a lot of money on voice or data plans.  They make their money on all of the overage fees, service fees and downloads you charge to your account. Make sure you get the right plans for your needs and stop with the added extras if you really need to pinch pennies. You can make your own extras and transfer them your device very easily.
• Smartphone Total Cost of Ownership is more than just the cost of the device. You have to factor in the costs of the data service, messaging service, and voice service and all of the associated charges and fees.

Being connected is great; but in this economy, protecting your checking account is much, much better.