Why “Free” phones are a scam

Introduction

It’s amazing to me that people still fall for marketing ploys, but it seems that the word “Free” just activates parts of the brain that cause people to ignore common sense and forgo critical thinking.

The Old Scam

The old scam worked like this:

The carriers charged a high fee, high enough that they could offer you a “Free” phone, and still earn a profit. When you signed up for a new account, you committed to 2 years, and got a “free” phone, which was also paid off within the two years.

If you cancelled early, you could need to pay the remaining balance of your phone, plus a cancellation fee. At the end of your contract, you could cancel without penalty, but if you didn’t cancel during that month, then the contract would auto-renew for another two years.

Near the end of your contract, the carrier would usually send you a post card notifying you that you have a “special opportunity” to get a new phone again for “free”. Many people would take the opportunity to upgrade, at which point they are locked into a high priced plan for another two years. Even if consumers chose not to upgrade, they would still pay the same rate – the carrier would just get to keep more profit. Users could change to another carrier, but they would need a new phone, and the new carrier would use similar tactics.

As an example, say Docomo charged 8,000 JPY per month for a high end plan.

You could sign up for an iPhone, which cost 960,000 JPY, and they would bill it as 4,000 JPY per month. However, because you were “such a good customer” they would offer you a special support package, where they would discount your bill by 4,000 per month for two years. In effect, the phone is “free” as long as you commit to an 8,000 JPY per month plan for 24 months – that’s a total of 192,000 JPY. Hardly Free!

So you still pay “only” 8,000 per month. Officially, your service is 8,000 and the phone is 4,000, making 12,000 per month – but they give you a discount of 4,000 per month – so you only pay 8,000 per month at the end. This only matters when you try to cancel half way through, because then they can say “Well you still owe us for the phone, plus a cancellation fee”. Say you cancelled after 12 months, you would owe 48,000 + 10,000 cancellation fee – that’s 58,000. That was enough to prevent most people from cancelling and being left with a useless carrier locked phone.

So – the answer to the question “Are free phones really free?” is “Technically, yes”. The phone is free in the sense that you don’t have to pay any money specifically for the phone – provided you commit to spending a large amount of money on service fees for the next two years. Is the phone free in the sense that you are getting something for nothing? Of course not.

With the rise of MVNOs, legislation requiring carriers to unlock phones, and the prohibition of “free” phones, the carriers had to think of a new scam…

The New Scam

In order to work around the changing times, carriers had to update their scam. The new scam is even more complicated, and in practice holds people hostage for four years!

Let’s use Softbank’s “Museigen” (Unlimited) plan as an example. We’ll ignore for the moment the fact that it isn’t actually unlimited.

Softbank charges over 9000 JPY per month for this plan. You can get small discounts for having more than one person on the plan, having their home internet, etc., and points, etc. – but that’s all noise, so let’s just consider the base case of 9000 JPY per month.

Let’s assume you want to use an iPhone with their service. First of all, if you buy the iPhone from them, it costs 145,440 for the cheapest 128 GB iPhone 16 (including tax). If you buy it directly from Apple, it costs only 124,800. This means you need to pay over 20,000 more for the privilege of buying the phone from Softbank – not a great start.

This is to be paid as 410 JPY for the first 24 months, and then 5,650 for the next 24 months. So it will take you 4 years to pay off the phone, and you will pay a total of 145,440.

Then they say “Ah, but if you change to a new phone in the 25th month, then we will waive the rest of the payments!” So, if you change to a new phone every 2 years (and hand in your old phone), you can essentially pay only 9,840 for each phone.

Of course, they have designed it this way because:

1. You need to keep changing your phone every 2 years to avoid paying the full cost.
2. Their service is so expensive that you are paying the cost as part of the service fee anyway.
3. Even after 2 years, they can say you still “officially” owe them over 135,000. This means if you cancel your service, they can ask you to pay the rest of the price of the phone.
4. When you upgrade to a new phone, they have locked you in at high service rates for another 2 years.
5. Even if you decline to renew your service and get a new phone, they can start charging you over 5,000 per month for a 2 year old phone, on top of your service charges.

Once you have contracted with them using this type of setup, getting a new phone is the cheaper option when your contract comes up for renewal. (For the next two years, at least).

So once you contract with them, you are basically stuck upgrading your phone every 2 years whether you want to or not, and paying over 9,000 JPY per month.

Even if you sign up for their home internet, etc., and get all of the discounts available, you will only be able to lower your bill to 7,500 JPY per month, and once you decide you want to get off the train, you will be stuck paying almost 13,000 JPY per month for the next 2 years.

They give you a phone that is very cheap for 2 years, and then suddenly costs more after that – unless, of course you want to renew.

Now, let’s say you “need” an unlimited plan – you can still choose a plan like Rakuten Saikyo Plan (Unlimited), which will cost at most 3,168 JPY including tax. (It will cost closer to 1,000 JPY on months when you don’t use much data).

You can then buy your phone from Apple directly and pay the cheaper 124,800 price. If you absolutely need a new phone but simply can’t afford to pay for it all at once, you can still pay 5,904 to Rakuten every month for 2 years, 2,952 JPY every month for 4 years, or 3,466 JPY every month to Paidy, JACCS, or whoever Apple is using this month.

Four year cost comparison

Carrier	Monthly Fee (Service)	Phone (years 1-2)	Phone (Years 3-4)	Total Service	Total Phone (Years 1-2)	Total Phone (Years 3-4)	Grand Total
Softbank	9,000	410	0	432,000	9,840	0	441,840
Softbank (No new phone)	9,000	410	5650	432,000	9840	135,600	577,440
Rakuten	3,168	2952	2952	152,064	70,848	70,848	293,760
Rakuten + Apple	3,168	124,800	0	152,064	124,800	0	276,864

The table above makes Softbank look better than it is for three reasons:

1. We rounded down the plan cost to 9,000 JPY per month.
2. We put 0 in the “Phone (Years 3-4)” column – but since you have to get a new phone to make this number zero, presumably you will be paying around 410 per month again on the new phone even if the old phone is 0. This will add around 9840 to the total for scenario 1.
3. The scenario is also unfair because we are trying to look at only 4 years here, but the top scenario assumes you have committed to spending the same 9,000 per month for years 5 and 6 at the beginning of year 3.

The difference between the last two scenarios is whether you buy the phone from Rakuten and pay it off over 4 years vs. whether you but it from Apple using a one time payment. There are other options (f.e. 2 or 3 years), but this is just to give an example.

The result is clear. Even choosing the worst scenario for Rakuten and the best scenario for Softbank, you save just shy of 150,000 over 4 years, which works out to 37,020 per year.

Caveats:

• This comparison assumes you will keep the same phone for 4 years in cases 2, 3, and 4. If you really need a new phone every 2 years forever, then the rakuten + apple cost would be 76,032 service plus 124,800 for the phone = 200,832 for 2 years of service with a new phone. This compared with 225,840 for Softbank. This is only a difference of 12,504 per year which is possibly justified by other minor plan differences, such as the per minute rate for calls, definitions of “unlimited”, etc.
• However, bear in mind that scenario 1 assumes you give up the old phone, whereas none of the others assume that. In scenarios 2-4, you can either keep the old phone or sell it, so they are even better than they appear.
• As soon as you stretch your phone usage to 3 years, though, the difference starts to grow. The longer you can hold onto your phone, the worse Softbank gets.
• This post isn’t meant to demonize Softbank, as au and Docomo aren’t much better in terms of the tricks they play. Likewise, Rakuten isn’t necessarily the best option for everyone, just a good point for comparison.

Personal Experience

I use an Sony Xperia phone, which I bought in one payment from Sony for about 100,000 about 4 years ago. It is still quite fast, works well, and is only half full. (The direct version has 512GB of storage and a Micro SD card slot).

I use OCN, which costs around 1,200 per month, but with taxes, fees, and a few voice calls, etc. it usually comes out to around 1,500 JPY per month in practice.

This means I have paid for the last 4 years: 36,000 in service, and 100,000 for my phone giving a total of : 136,000. I’ve saved over 300,000 JPY in the past 4 years compared with the cheaper Softbank option listed above. I can cancel at any time, and I don’t owe any money on my phone. Do I get the same service as the plans above? No, I only get 170 MB per day. Since I have WiFi at home and work, that is plenty for me. I would rather spend that 300,000 yen somewhere else.

When will I replace my phone? Maybe in about another year or so. It used to be that specs changed to rapidly people wanted to upgrade their phone as often as possible. These days things are already pretty good, so I feel very little incentive to upgrade. Given that my phone is still fantastic and changing phones is a pain, it’s more likely I will just get the battery replaced at some point.

Conclusion

If you are someone who needs a data plan with a very high limit, so be it. In some cases the major carriers may even be your best option – but buying a phone through your carrier with “discounts” or “support” is almost always a trap designed to lure in the unsuspecting victim and keep them paying high fees for both service and phones for as long as possible.

Don’t be scammed.

If you want a new phone, buy it direct from the manufacturer. If you can stomach a used phone, buy it from a place like Janpara, Sofmap, Backmarket, etc. Some of these places even sell “unused” phones, which will allow you to get carrier specific models.

Make a contract for the SIM card (or eSIM) only. Don’t contract with any carrier that won’t sell you service without also selling you a phone.