Cheap Smartphones Are a Myth

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The latest AT&T (NYS: T) ad for the Impulse 4G features a smartphone owner and an envious co-worker, rattling off the many features of the new Google (NAS: GOOG) Android handset as he continuously pries the Impulse 4G away.

They wind up at an AT&T store, pitching the $29 price.

"I can afford that," the jealous friend realizes -- and the commercial ends.

Can he, though? Once again, the myth of cheap smartphones is beginning to permeate the airwaves.

When Apple (NAS: AAPL) rolls out the iPhone 4S on Friday, the 3GS -- Apple's 2009 model -- will be available for free.

Free? Well, not exactly. The $29 Impulse 4G and the "free" iPhone 3GS are tied to two-year contracts. An early termination fee of $325 -- minus $10 for every month already completed -- applies to AT&T buyers that suddenly realize that they may be in over their heads with these "cheap" devices.

It's a fair fee, since wireless carriers are subsidizing these smartphones to the tune of hundreds of dollars apiece. However, shouldn't this all be disclosed more prominently?

Between voice, data, and messaging plans, don't be surprised if these buyers wind up forking over close to $2,000 over the course of a two-year contract. AT&T and Verizon (NYS: VZ) may offer cheap entry-level data plans, but 200 megabytes of data can go pretty fast -- especially given the Internet-surfing obsessions being professed by the commercial's protagonists.

Sprint Nextel (NYS: S) and T-Mobile have positioned themselves as slightly cheaper alternatives, but every discounted rose has its thorns. Sprint has been losing money for years, and who knows what T-Mobile's pricing will be if regulators allow it to be gobbled up by AT&T. Besides, it's not as if even those carriers are insanely cheaper than the two market leaders.

Smartphones have become the record clubs of the new generation. You remember those clubs where you would get a dozen CDs for a penny, but then were saddled with months of unwanted discs at list prices?

Don't get me wrong. Smartphones are great. They're not some cheesy scam. However, allowing the marketing emphasis to rest on the low entry price instead of the actual cost of ownership is as wrong as it is deceiving. My critique is genuinely free, and you won't have to put up with me for the next two years if you don't want to.

If you want to see how the smartphone war plays out, follow the relevant companies by addingGoogleandAppleto My Watchlist.

At the time this article was published The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of AT&T and Apple, as well as creating a bull call spread position in Apple. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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