A huge draw for postpaid cellular service is that most providers give away phones when you sign a new contract. There are certain models made available for these promotions, and they bring in the subscribers. Even if a new customer wants a different phone, a subsidy is applied to that purchase. That is, the service provider picks up some of the tab for your new phone.

Beyond the attractive marketing opportunities this presents, there's an overarching reason why carriers subsidize new phone purchases. Simply, in postpaid service, you're tied down to a contract, the norm being two years in length.



So how, exactly, does this work?

Here's the idea behind subsidizing phones. For whatever reason, cell phones are rather expensive. This might be because of high mark-ups somewhere along the production line, or it might be that the phones actually cost that much to produce. In any event, it's tough to get people to drop serious money on a cell phone. Not only do you have to pay for service on top of it, but they're especially fragile.

Think of your TV service. It's a similar situation in that you have to buy a TV, and then buy the cable service. However, TVs are less volatile than cell phones. They stay in one plays, rather than being trucked around in your pocket or purse. Because cell phones are mobile, they're far more apt to break. So this either means paying more for insurance, or paying for another phone down the road. Neither is very attractive -- especially considering how we've made cell phones an essential instrument in our daily lives.

Somewhere along the line, cell phone companies figured out that the best way to entice customers was to offer a discount on phones. But if they're taking a hit in that department, they have to make up for it somewhere else. Hence, the two-year contract. Over the two-year term, the company figures to make back its investment in the subscriber's phone. This is also why they employ early termination fees. When you cancel before your contract is up, you're repaying the company for the subsidy they provided you.

No commitment means no subsidy

Since the nature of prepaid cellular service revolves around the lack of commitment involved, it makes sense that companies don't offer much of a subsidy, if any, for prepaid subscribers. Much of the time, this means you're paying full retail price for a phone, which can now get up into the $300 and $400 rage for the top models. The companies' logic is that they don't want to give out a subsidy only to have you break away from their service in three months. This becomes a larger issue with the prevalence of phone unlocking and reprogramming services. Since there's no way to penalize a prepaid user -- since they never agreed to a length of term -- there's no way to recoup that subsidy. Hence, there is none, for the most part.

The best offer in this regard from many companies comes in the form of a packaged prepaid phone and service card, which you can buy at local retail outlets like Wal Mart and Target. These are typically lower-end models -- you can find a list of such packages in our activation guides. The downside is that these are older, often flimsy phones. The upside is that you can get one for usually around $20.

So why do prepaid companies offer a subsidy in this form? Well, for starters, the age of the phone has something to do with it. Typically, it would be harder to sell such phones to postpaid customers. Since they get a subsidy, they're looking for better phones. Most times, subsidized "free phone" that comes when you sign a contract is superior to the models you'll find in prepaid packages.

Second, the prepaid carriers are betting that most customers will eventually buy enough airtime to cover the lost cost of the packaged phone. The problem is that they have no control over the situation. You could go and buy one of those phones and never activate it. This puts the company out a sum of money -- though they would have been out the entire cost of the phone had it not been purchased in the first place. So in a way, it's a cutting of losses, with the hopes that they can recover those costs through airtime.

This is also why many retailers limit the number of prepaid phones you can buy. You might get a number of reasons from retail employees as to why this is policy at most stores. But the real reason is that they lose money on the initial transaction alone. In order to make money, they need you to activate and use the phone. As a result, most stores won't sell you more than two prepaid phones, which is a huge downer for someone (you know, like us at Prepaid Reviews) who wants to conduct research to help inform potential and existing prepaid customers.

Which companies do offer subsidies?

On higher end phones, you'll rarely see a subsidy. Sometimes, you'll see an online rebate offered through providers, such as Cricket. This has more to do with lower costs for doing business online than anything else. With an online store, you you have a lower rent cost (server space is cheaper than a physical store), no utilities, and no sales people to pay. No sales people means no commissions, so they can offer phones at a lower price. (Note, however, that many cell carriers, like Verizon, have done away with commissions at the corporate level.)

So if you're looking for a discount on a phone, definitely do it through the web. You can check out our featured providers for links to each provider's website. You'll find a number of discounted phones in the web setting, including refurbished phones. Of course, there are other companies which do not offer a discount whatsoever for their phones. This should be considered standard. Since they have no commitment from you, there is no obligation to offer a phone discount. However, this just makes the companies that do offer a Web discount all the more attractive.

Free prepaid phones

Yet, there are still a few prepaid carriers that do offer free phones when you purchase airtime. Normally, these phones are far out of date, and oftentimes they are refurbished models. But they are free, and that's tough to overlook. So here's a list of providers where you can nab a free phone.

Alltel: The LG AX415 isn't free, but it's only 99 cents, so close enough. They also have a number of phones under $25.

Earth Tones: You can get a Nokia 1112 -- an ancient model -- for free.

Liberty: You can get the refurbished Motorola T730 for free, as well as a new Nokia 2270.

STi Mobile: Grab yourself a Sanyo 200 for no charge.