SIM Only vs Pay Monthly Contracts: The Most Cost-Effective Way to Buy a Mobile Phone

SIM Only vs Pay Monthly Contracts: The Most Cost-Effective Way to Buy a Mobile Phone Shahrum Nedjati-Gilani CEO & Founder, HandsetExpert February 5, 2016 1 Introduction As of the end of 2014, 94.7% of the UK population aged 15+ own a mobile phone [1], covering 89.9 million subscriptions including handset subscriptions, dedicated mobile broadband data connections and machine-to-machine connections [2]. The majority of smartphone owners in the UK purchase their device as part of a Pay Monthly contract, with estimates varying from 56.4% to 73% [1, 2, 3, 4]. An alternative purchasing model is to separate the purchase of the phone from the contract by buying a SIM Free device, and opting for a SIM Only contract alongside the phone. Conventional wisdom has suggested that this a more cost-effective way to purchase [5], but no substantial quantitative data exists to validate this. We investigate whether purchasing a phone as part of a pay monthly contract is more expensive than purchasing the phone and SIM Only contract separately, looking at a selection of devices and tariffs. 2 Method 2.1 Phones Used To perform the comparison, we considered 55 smartphones currently available for purchase in the UK retail market, covering a range of budgets from budget to premium (see Appendix A). In cases where there are multiple versions available (e.g. the iphone 6s, which is available in four different colours, each with three storage size options), we considered the cheapest option. 2.2 Tariffs Considered We defined the following categories, based on either data allowance or inclusive minutes, and considered Pay Monthly and SIM Only contracts that fell within these categories: 1

Contracts with 1GB data Contracts with 2GB data Contracts with 3-5GB data Contracts with 6-10GB data Contracts with 11-15GB data Contracts with 16-20GB data Contracts with unlimited 4G data 1 Contracts with 250 minutes Contracts with 250-500 minutes Contracts with 500-1000 minutes Contracts with 1000-2000 minutes Contracts with over 2000 minutes Contracts with unlimited minutes For each phone and category combination, we found the contract with the lowest total cost of ownership (TCO). For Pay Monthly contracts, we calculated the TCO by multiplying the monthly payment by the duration of the contract measured in months and adding any associated upfront costs. We did not include cashback, free gifts, vouchers or other incentives as part of the calculation. In the case of SIM Only contracts where the contract length is less than that of the Pay Monthly contract, we multiplied the monthly payment by the duration of the Pay Monthly contract. In the case of SIM Only, we also included Prepay bundles offering an monthly allocation of minutes, data, and texts. We did not take into account: Legacy tariffs no longer available to customers, or tariffs only available to existing/specific customers. Additional charges for payment methods other than direct debit, and for receiving itemised or paper billing. Potential increases in the cost of contracts which service providers may add in accordance with the rate of Retail Prices Inflation (RPI). In an attempt to create the flexibility of SIM Only contracts in a Pay Monthly model with a phone, whilst also allowing buyers to avoid large upfront payments, some networks offer Pay Monthly contracts that split the monthly payment into a device and a tariff component (e.g. Virgin Freestyle, O2 Refresh). This can allow for greater flexibility in tariff compared to traditional Pay Monthly contracts, and allows buyers to upgrade at any time by paying off the outstanding device payments. In order to ensure a fair, like-for-like comparison, we have assumed that in such cases, the tariff remains constant over the course of the contract. 2.3 Pricing Data Sources We acquired contract and pricing information both directly from retailers and via services that provide data feeds on behalf of retailers. The data was acquired on February 3rd, 2015. In total, we used pricing data from 40 retailers, operators and networks, listed in Appendix B. The data covers Pay Monthly and SIM Only tariffs from 17 operators and networks. 2.4 Comparison A total of 1,316,835 Pay Monthly contracts with phones were analysed across 50 devices. For each device, the contracts were broken down into the 13 tar- apply. 1 For tariffs which offer unlimited allowances, traffic management or fair usage policies may Page 2

iff categories previously specified. For each phone and tariff combination, we searched for: The lowest price for a Pay Monthly contract from UK retailers and networks that met the criteria specified in the Tariffs section above (C pm ) The lowest price for separating the tariff and the phone purchase (C se ), obtained by adding the lowest SIM Free price available to the total cost lowest of the corresponding SIM Only contract. As SIM Only contracts tend to have a shorter duration than Pay Monthly contracts with phones, we extend the SIM Only contract to match the duration of the Pay Monthly contract. From these, we calculate the difference in price between C pm and C se : = C pm C se Cases where > 0 signify that purchasing the phone and contract separately are cheaper, and < 0 indicates that buying the phone as part of a Pay Monthly contract is more cost-effective. Of a maximum possible 650 phone and tariff combinations, we have sufficient data to calculate for 599 combinations. Using this information, we first look at for every available phone and tariff combination in order to see how often buying separately is more cost-effective. We then look at both across all phones for each contract type and across all contract types for each phone. Finally, we look at correlations between handset value and for each tariff to try and disentangle the effect of handset versus tariff type. 3 Results 3.1 Overall, is it cheaper to buy separately for every phone and tariff combination? Figure 1 shows a heatmap representing for every phone and tariff combination for the data available. Overall, we find that in 465 cases (77%), purchasing a phone and SIM Only contract separately is cheaper than purchasing a phone with a monthly contract. In the remaining 134 cases (23%), purchasing a phone with a monthly contract is the cheaper option. Across all combinations, the mean value of is 112.86, with a standard deviation of 146.14, covering an overall range of - 86.00 to 681.00. The upper boundary is artificially high due to expensive contracts accompanied by gifts or cashback incentives, although the value of such incentives are not sufficient to alter > 0. Removing such deals lowers the upper boundary of the range to 400.97. Although the mean value suggests that it is better to buy the phone and SIM Only contract separately, the standard deviation is high, indicating significant pricing heterogeneity across phones and tariff combinations. To try and understand this heterogeneity further, we now consider the price differences by tariff type and phone. Page 3

Figure 1: Heatmap showing for all combinations of phones and tariff types. Green indicates purchasing phone and SIM Only contract separately is cheaper ( > 0), red indicates purchasing the phone as part of Pay Monthly contract is cheaper ( < 0), and black indicates no data is available. Page 4

Figure 2: Graph of average price difference by tariff type ( t ). The red crosses indicate the maximum and minimum price differences for each category, and the error bars represent one standard deviation. 3.2 Is it cheaper to buy separately for every tariff type? Figure 2 shows the mean price difference for each tariff type across all devices ( t ). Looking for each tariff type across all phones, we can see that for every tariff type bar tariffs with 1GB data, t > 0, which suggests that it is cheaper to buy the phone and contract separately. Figure 2 also suggests that purchasing a phone as part of a contract is more likely to be more cost effective for tariffs with lower data or talk allowances. For example, when considering lowest cost tariffs with 1GB data, purchasing a phone as part of a pay monthly contract was cheaper in 33 phones looked at (66%). However, this number drops to below 5% when looking at tariffs containing 3GB and above. Also, the absolute value of t is notably lower for contracts with smaller allowances (e.g. 8.76 for tariffs with 1GB vs 222.93 for tariffs with 16-20GB). 3.3 Is it cheaper to buy separately for every phone? To answer this, we look at the average price difference across all tariff types for each phone ( p ). For all 50 phones, we find that p > 0, again suggesting that it is cheaper to purchase the phone and contract separately (Figure 3). Whilst p > 0 for the vast majority of the 50 phones looked at, only for 10 phones do we find separate purchases more cost effective across all tariff types; for the remaining phones, we can find tariff types where buying the phone on a Pay Monthly contract is more cost effective. Page 5

Figure 3: Graph of average price difference by phone ( p ). The red crosses indicate the maximum and minimum price differences for each category, Page and 6 the error bars represent one standard deviation.

No significant Significant negative Significant positive correlation correlation correlation 1GB data 2GB data <= 250 minutes 250-500 minutes 500-1000 minutes 1000-2000 minutes 3-5GB data 6-10GB data 11-15GB data 16-20GB data unlimited 4G unlimited minutes over 2000 minutes Table 1: Tariffs listed by significance of correlation between and handset cost. 3.4 Is there any correlation between the value of the phone and? In Figures 4 and 5, for each tariff type we plot for every phone against the lowest SIM Free price. Figure 4 shows these plots for tariffs with increasing data allowances. Figure 5 shows these plots for increasing minutes. We use Pearson s rank correlation coefficient to measure correlation. Tariffs with p 0.05 indicate a significant correlation between the phone value and (Table 1). The results suggest: There is no significant correlation between the value of the handset and for the lowest cost tariffs with limited data and all but the greatest voice allowances. For the lowest cost tariffs with larger amounts of data or unlimited minutes, there is a significant negative correlation between the handset value and. This indicates that for lower cost handsets, buying the phone and contract separately will save money, and the amount of money saved is more substantial compared to higher value handsets. From this we can interpret that Pay Monthly contracts for lower cost handsets with these tariffs are overpriced both relative to their SIM Only counterparts and relative to more expensive handsets with the same tariff. When considering the number of included minutes, the picture is less clear. In pay monthly contracts under 2000 minutes, no significant correlation appears to exist. With a large but finite number of minutes, there is a significant positive correlation. As > 0 for all cases with over 2000 minutes, Pay Monthly tariffs are overpriced for all phones, and buying a phone and contract separately is the more cost-effective option. The difference in price increases as the handset becomes more expensive. Interestingly, this trend is reversed when considering tariffs with unlimited talk time. 4 Conclusions Overall, we find that it is more cost-effective to purchase a phone and SIM Only contract separately as opposed to purchasing the phone as part of a Pay Monthly contract, though the variability of results suggests that the decision is best judged on a case-by-case basis. Grouping the data by tariff type suggests Page 7

Figure 4: Plots showing correlations between handset price and by tariff type (data). For each plot, we indicate the correlation coefficient ρ and p-value (p). Page 8

Figure 5: Plots showing correlations between handset price and by tariff type (minutes). For each plot, we indicate the correlation coefficient ρ and p-value (p). Page 9

that it is cheaper to purchase the phone and contract separately, especially for contracts with larger allowances. Grouping the data by phone shows again that in the majority of cases, it is cheaper to purchase the contract and phone separately, but there is no clear pattern between age or value of the phone and the amount saved. Finally, lower cost handsets purchased as part of a Pay Monthly contract with a large data allowance are significantly overpriced, not just relative to buying the phone and contract separately, but also relative to expensive handsets with the same contract allowance. Another benefit of choosing a SIM Only contract is that the contract lengths are almost always shorter than Pay Monthly contracts, offering greater flexibility. However, the key disadvantage is the high upfront cost associated with purchasing the phone SIM Free upfront - which can be over 600 for the latest, premium phones. Customers wanting to purchase these types of handsets may still prefer to split the cost over monthly installments, but we suggest that users thoroughly research both deal types before purchase to ensure they get the most for their money. Acknowledgments The author would like to thank Gemma Nedjati-Gilani for helpful discussions and editing of the manuscript. References [1] The Global Media Intelligence Report - Western Europe, emarketer, September 2015 [2] Tbe Communications Market Report, Ofcom, 6 August 2015. [3] Mobile Phones (Market Update), Key Note, 2015. [4] Mobile Phones, Mintel, April 2015. [5] Getting the best deal on a new mobile phone, BBC News, 26 September 2014. Appendices A List of phones used in the comparison Apple iphone 5s Apple iphone 6 Apple iphone 6 Plus Apple iphone 6s Apple iphone 6s Plus BlackBerry Passport BlackBerry PRIV Doro Liberto 820 Mini Google Nexus 5X Google Nexus 6 Google Nexus 6P HTC One A9 HTC One M8s HTC One M9 Huawei P8 LG G3 LG G3 S LG G4 Page 10

LG G4c Motorola Moto E (2015 Version) Motorola Moto G (2015 Version) Motorola Moto X Force Motorola Moto X Play Motorola Moto X Style Microsoft Lumia 435 Microsoft Lumia 535 Microsoft Lumia 640 Microsoft Lumia 950 Microsoft Lumia 950 XL Samsung Galaxy A3 Samsung Galaxy A5 Samsung Galaxy Alpha Samsung Galaxy J1 Samsung Galaxy J5 Samsung Galaxy Note 4 Samsung Galaxy S4 Samsung Galaxy S4 Mini Samsung Galaxy S5 Samsung Galaxy S5 Mini Samsung Galaxy S6 Samsung Galaxy S6 Edge Samsung Galaxy S6 Edge Plus Sony Xperia M4 Aqua Sony Xperia Z3 Sony Xperia Z3 Compact Sony Xperia Z3 Plus Sony Xperia Z5 Sony Xperia Z5 Compact Sony Xperia Z5 Premium B List of Retailers Affordable Mobiles Apple Argos Asda Mobile BT buymobiles.net Carphone Warehouse Clove Currys e2save Ebuyer EE Fonehouse GiffGaff Google Store id John Lewis Laptops Direct LIFE Mobile Littlewoods LycaMobile Mobile Phones Direct Mobiles.co.uk mobileshop Motorola O2 PC World phones.co.uk Pixmania ROK Mobile Simply Electronics The Smartphone Company Talk Mobile Tesco Direct Tesco Mobile Three The People s Operator Very Value Basket Virgin Media Vodafone About HandsetExpert HandsetExpert (http://www.handsetexpert.com) is a recommendation and price comparison site for mobile phones and SIM Only contracts, based in London, UK. Founded in 2014, we pride ourselves on our ability to find the best deals and prices available and providing helpful, unbiased information. With our easy-to-use interface, and unique features such as our SIM Only vs Pay monthly comparison engine, we ensure our customers always find the right phone and tariff for them. Page 11

About the Author Shahrum Nedjati-Gilani is the founder of HandsetExpert. He is a graduate of the University of Cambridge and University College London, and has a doctorate in Computer Science. His career and interests have spanned a variety of topics in science, engineering and technology. Dr Nedjati-Gilani is a published author in the fields of imaging and vision, and is using his skills and expertise to make HandsetExpert the ultimate recommendation site for phones and tariffs. Page 12