Skip to main content

Would you take a loan out from your banking provider at 25% repayment over 2 years?

This insight relates to an almost universally misunderstood aspect of mobile phone contracts.  I see this on a weekly basis, where a good mobile phone salesman (who doesn’t understand either) makes the case that their deal includes say 15 Free iPhones, versus the rival offer where no free phones are added.  The former usually wins the deal.

Consumers and hence business users, where their company pays, have been conditioned since the dawning of the industry in the mid-90’s that phones are free and simply come with the contract. What you need to get your head around is that when you are dealing with mobile phone purchases there are 2 separate purchases happening:

  1. Purchase 1: Services. You are buying the right to use the mobile phone masts and signal provided by one of the 4 UK networks and your access to that network is controlled by the sim card in your phone.  So, if you like, you are leasing/renting in effect the sim card.  This is the “Service Contract” and covers your calls, texts, data and whatever other benefits that contract might come with say access to the O2 lounge at the Arena in London etc.
  2. Purchase 2: Goods. Secondly you have the OPTION, it is an option, to buy a new phone if you need one.  However, if your current phone is working, it meets your needs and you are not an early adopter that always enjoys having the latest tech then stick with the phone you have.

If you do decide to get a new phone on contract that is “free” then the service contract will then be loaded with extra costs to cover it.  The easiest way is to look at some basic numbers.

Let’s say the Service Contract (known as Sim Only) part of the deal is £5pcm (let’s keep the numbers simple not necessarily realistic) but you want a £360 iPhone SE.

  • If you BUY the phone, then the total cost over 2 years is £5 x 24mths + £360 = £480
  • If you get it “free” then the sim cost doesn’t jump to £20 to give you the same £480- total, this is where you get robbed blind and the sim cost becomes £25pcm, but you get blinded by the “free” phone and you then spend £600 that’s 25% higher and is not untypical.

That’s the simple view.  However for corporate fleets the networks and the dealers know how to make deals so complex you don’t truly know what you’re getting and can’t compare like with like very easily – some of the weapons in their arsenal include:

  • Bump up the cost of the data bundle, minutes bundle, line rental etc, but then give you a line rental discount.
  • Give you a large hardware fund pot but add a use it or lose it clause forcing you to spend it on new hardware instead of having it paid out as cash.
  • Give you various free minutes and bespoke tariffs on say Non-Geographic numbers, International Dialling, Roaming Tariffs.
  • Different tariffs for different user types.
  • Instead of a single large data bundle of say 400Gb, they might give 100 Extra sim cards each with say 4Gb of shared data, giving an overall lower cost per sim on the deal. Which is often the headline figure someone not involved might look at to sign off on a deal.

Funding & Cashflow

The counter argument is that when cash is king, having a hardware fund or “free” hardware means you are effectively getting an off-balance sheet line of credit and you get to keep the cash in your account for longer.  There is no right answer, as long as you understand what you are buying and the structure of the deal.  What price is that cashflow worth to you, when is the hidden APR too high?

OF course there is another way – outsource the procurement and fleet management to an expert.

Finally – all the above isn’t always true, I’ve just this week had an offer for a client where the hardware fund of c£20k is 0% Interest i.e. Interest Free.  The deal on all the other elements (sim card rental, data bundle etc) is exactly the same with or without the £20k.  So £20k interest free loan in effect.

Article by: David Powell

As seen in Issue 5 of The Bottom Line