"Free" phones - not so free after all

Mobile phone companies are on to a good thing. Everyone's favourite tax-averse phone operator, Vodafone, made a pre-tax profit of £633m from its UK operation alone in 2011, with a total global profit for the year at somewhere in the region of £11.5bn. Given these enormous profits, it's easy to see how these companies can afford to be so generous in giving away "free" handsets with their mobile phone contracts. A generous way of thanking their loyal customers, no doubt.

Well, maybe not. Despite the number of deals available where the phone is said to be "free" - look here, here or here, just as examples - these phones aren't free in any meaningful sense of that word. In fact, given how much you end up paying for them, it's hard to see why the Office of Fair Trading doesn't have something to say about this description.

Let's look at some examples.

The website www.mobileshop.com is today offering a "free" Samsung Galaxy S II from Orange for £31 per month. The contract lasts 24 months (fairly standard these days) and you get:

• 600 minutes of talk time
• unlimited texts
• 250mb of data
• £10 cash back (why??)

So the total cost of this contract, spread over 2 years (during which you cannot leave the contract, of course) is £734.

If the phone itself is "free", that £734 must all be going into buying the minutes, texts and data, right? Well, not really. Orange also sell a sim-only contract. It's not quite the same (obviously - that would make the comparison too easy), but almost. The sim-only contract costs £21.50 per month. There is no on-going contract at all, so you can leave it any time, and you get:

• 500 minutes of talk time
• unlimited texts
• 250mb of data

So, 100 fewer minutes of talk time each month, but - assuming that you chose to stay with this deal for 2 years - the total cost would be £516. That's £218 less than the deal that comes with the phone.

Now, in case you're thinking that 100 minutes of talk time every month is worth £218 (or £9.08 per month), let's compare with another sim-only contract with Orange. The deal is the same as the one above, but with 800 minutes of talk time per month, and costs £26 per month. In other words, an extra £5.50 per month for 300 minutes - so 100 minutes of talk time costs less than £2 per month.

Let's deduct that from our calculations to be as fair as possible here. That gives us an extra £48 on the total cost, bringing the grand total to £564 - which is still £170 less than the cost of the contract with the phone included. Surely the only explanation for this is that you are paying £170 for the phone - and if that's the case, in what sense is it "free"?

That was fun, so let's play again!

This time, our operator of choice will be O2. Again, it's a 24-month contract, now for an HTC Sensation XE - "free" for just £27 per month, for which you get:

• 300 minutes of talk time
• unlimited texts
• 500mb of data
• £25 cash back (!?) 

This time, the exact same deal is available on a sim-only contract for £21.50 a month - and again, that's a 1-month contract, so you can walk away from it at any time.

The package with the phone costs you £623 over 2 years, whereas the same deal on sim-only costs you £516. Once again, is there any explanation for that extra £107, other than that is what you are paying for the phone itself? And if something costs you £107, how can it be described as "free"?

Just to be clear, I'm not saying that these are necessarily bad deals. The Samsung Galaxy S II is not a cheap piece of kit - the best deal I've found for the phone alone, with no contract at all, is £386. The HTC Sensation XE likewise will set you back a bit - the best I've found is £369. So it's not that the phone companies are necessarily selling bad deals - spending £170 over 2 years, rather than £386 up front; or spending £107 over 2 years instead of £369 up front. It's just that getting a good deal is different from being given something for free.

Thanks to John-Paul Shepherd for pointing me to this 'call a spade a spade' idea.