Leading Aussie telco economist warns against signing two-year contracts

BEFORE you rush out on Friday for the new iPhone, stop and think. That locked-in contract is costing you more than you realise.

A LEADING Australian telecommunications economist has issued a strong warning for those about to sign a 24-month contract to secure the new iPhone 7 when it is released on Friday.

John de Ridder says his advice has nothing to do with the smartphone; it is based on that fact that many overlook the hidden costs in two-year telco contracts.

Mr de Ridder said Australian telcos lured customers into 24-month contracts by offering a so-called “subsidy” on the handset.

“Two-year contracts offering premium handsets might look like the carrier is heavily subsidising the new smartphone, but this isn’t necessarily the case,” he told news.com.au.

Mr de Ridder said comparing the data allowance of a contract plan with its nearest comparable BYO SIM-only plan can demonstrate there is actually no subsidy at all, as the remaining handset costs are hidden in the monthly plan fee.

“Vodafone’s entry-level $40 iPhone 7 plan is $18 more expensive than the equivalent SIM-only plan,” he said.

“While the $45-per-month handset repayments make it look like you’re only paying $1080 for the iPhone 7 128GB (RRP $1229) over two years, that price difference adds another $432 to the contract term — so you’re actually paying $1512 in total to get the iPhone.”

You might actually end up paying more if you enter a contract.

A spokeswoman from Vodafone said customers do have the choice to get a new phone, without entering into a plan.

“Vodafone customers are being offered the option to pair a no contract sim-only plan with an interest-free payment plan on a phone,” the spokeswoman said.

“This means customers are free to pay off the phone in monthly instalments over 6, 12, 18, 24 or 36 months. There’s no interest charged, and no fees.”

Mr de Ridder said instead of being attracted by the allure of a new smartphone, people seriously concerned about budget should switch to a SIM-only plan and buy a second-hand device.

“With people taking advantage of the iPhone 7, there is going to be a lot of people selling their older iPhone 6 models,” he said.

“By looking around, you could get a handset less than 12 months old for half the price.

“As you will own that phone outright, you will also have the freedom to move chop and change between monthly SIM-only contracts, which will save you in the long term.”

Mr de Ridder said it was a better option to buy the iPhone 7 outright and select a SIM-only plan.

“As an example of the wisdom of using a SIM-only plan, let’s take the iPhone 7 (128GB). You could get this on a two-year contract with a Telstra $55 Go Mobile Plus plan (1GB of data), in which case the handset fee is $39 per month and total monthly cost is $94, for a total cost of $2256 over two years,” he said.

“Or you could buy the iPhone outright for $1229 and add, say, the amaysim 1.5GB SIM-only plan for $24.90 per 28 days (works out to be $27 per month). Over two years, the cost of the SIM-only option is $1878, which is $378 cheaper than the Telstra option.

“It also allows you to move to any more attractive offers that crop up over the next two years because you own the phone and are not handcuffed to a contract.”

John de Ridder suggests people look for 12-month-old phones if they are chasing a bargain.

The economist said customers don’t give up much value by avoiding the two-year contract.

“Because you’re committing to a set plan, you have to be sure that your usage over the term of the contract will more or less stay the same, and that’s a tough call given the huge growth in data usage that’s expected in the future,” he said.

“The reality is that a lot will change over the next two years and what Aussies need from their mobile plan in six, 12 or 18 months is likely to be very different to what they are using today.”

News.com.au explored this issue in an opinion piece earlier this year by examining a Vodafone contract.

The article explained that when I had signed up to a Vodafone 80 Red 24-month plan, I was given infinite text, infinite standard national calls and a minuscule 2.5GB of data.

Yet, the same 80 Red 24-month plan at the time of writing offered 9GB of data to coincide with the unlimited talk and text.

While most telcos will give the option to upgrade your contract to match allowance plans of the same price, this is not widely advertised to customers and often hard to find.

Instead, the telcos will often direct you to where you can buy add-ons, which is more lucrative for them.

So before you rush out to buy the new iPhone 7, Mr de Ridder has one last word of advice.

“Before committing to a two-year plan, think if it’s going to be better to use a SIM-only plan with a smartphone purchased outright,” he said.

Continue the conversation on Twitter @mattydunn11.

John de Ridder was commissioned by mobile service provider amaysim to explore the value equation of two year contracts.

Originally published as Leading Aussie telco economist warns against signing two-year contracts