The biggest phones of the year -- such as Apple iPhone 5, Samsung Galaxy Note II, Nokia Lumia 920 and Google Nexus 4 -- are relatively cheap at $49 to $399. But what will you pay in contracts and even software?
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Why do some smartphones cost a penny, while others bear price tags ranging from $49 to $399? The short answer is: it's complicated. The long answer has to do with register shock, subsidies and the allure of new gear.
Nearly all cell phones sold in the United States are subsidized by the wireless network operators. The carriers subsidize the cost in order to reduce the price you pay at the register for that shiny new smartphone. Although it has perhaps skewed Americans' perception of the real cost of hardware, it has helped push smartphones into the hands of more than half of all cell phone users.
As we head into the holiday shopping season, the hardware makers and their carrier partners have rolled out most of the devices they intend to sell between now and the Consumer Electronics Show in January 2013. Let's look at what costs what.
-- Apple iPhone. The iPhone 5 costs $199 for the 16-GB model, $299 for the 32-GB model, and $399 for the 64-GB model. The iPhone 4S with 8 GB of storage is available for $99, and the iPhone 4 with 8 GB of storage is available for free. Yes -- the cost of an iPhone ranges from "free" to $399. No matter which you choose, AT&T, Sprint, or Verizon Wireless is subsidizing the cost. The full retail price of the 16-GB iPhone 5, for example, is closer to $649. That means the carrier is eating $450 of the device's cost, which it hopes to make up by forcing you to sign a two-year agreement.
Apple has been very aggressive with its carrier partners and getting the subsidized cost to the lowest point possible. In fact, when it introduced the iPhone 3G in 2008, Apple helped push the cost of smartphones from the typical $499 down to $199 for most models. Keep in mind, however, that the iPhone is locked to the carrier that sells it.
-- HTC 8X, One X+. HTC's flagship Windows Phone is the 8X. It is being sold only by AT&T for $199.99 with 16 GB or $99.99 with 8 GB of storage. It runs Windows Phone 8. The One X+, a refresh of the One X, will cost $199.99. The full retail prices of these phones is somewhere between $600 and $700.
-- LG Optimus G. LG's top-of-the-line smartphone for the rest of the year is the Optimus G. It is being sold by Sprint and by AT&T. Both carriers are asking $199 for this smartphone with a new contract. The unsubsidized cost is $549.99.
-- Motorola Droid Razr HD, Maxx HD. Verizon Wireless is charging $199 for the Razr HD and $299 for the Maxx HD. The difference between the two is battery life. The Maxx HD's battery is about 33% larger. The unsubsidized cost of these devices is $599.99 and $699,99, respectively.
-- Nokia Lumia 920, 820. AT&T is charging some low prices for Nokia's newest hardware. The Lumia 920, which is Nokia's flagship smartphone, will cost just $99.99 with a new contract. The 820, which dials down the design a specs a bit, costs just $49.99. Verizon will eventually sell the 822, a variant of the 820, but it hasn't announced pricing yet.
-- Samsung Galaxy Note II. The Note II is an outlier due to its size and (assumed) higher raw cost. Sprint is asking $299 for it, but T-Mobile USA wants $369 for it -- after a $50 rebate, no less. The unsubsidized cost is $649.99.
-- Google Nexus 4. Then there's the Nexus 4. The Nexus 4, which is a modified version of the LG Optimus G, is being sold directly from Google to consumers for $299 (8 GB) and $349 (16 GB). These prices don't require contracts, and the phone is being sold unlocked, which means it can be used on any GSM carrier. If you think this is the raw cost of the hardware, though, don't kid yourself. Google is subsidizing the cost of this handset for U.S. buyers. The Nexus 4 is being sold closer to full price overseas, where it is retailing for about $600. Google hasn't said why it is subsidizing an unlocked handset, but you can be sure it isn't about selling phones as much as it is about selling good and services through the Google Play Store.
Alternately, the Nexus 4 can be purchased from T-Mobile for $199 (16 GB) with a new contract. Personally, the extra $100 to get the Nexus 4 unlocked from Google instead is totally worth it.
Most two-year contracts for smartphones range between $1400 and $2400 in total, depending on which services and options you choose. That $199 smartphone suddenly doesn't look so cheap, does it? You'll always be better off in the long run to pay the full price for a new smartphone and pair it with the lowest-possible-cost services, but that $600 price tag is no doubt painful.
If you don't have any problems signing a contract, you can typically get a good discount on the subsidized price when you purchase through third-party retailers. Smartphones will always cost the most when purchased directly from the carrier. If you go with Best Buy, AmazonWireless.com, WireFly.com, or other similar sites, you stand to save $100 or more on each smartphone. For example, the HTC One X is available for one cent from AmazonWireless.com.
Smartphones and their service plans are not cheap.
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