I hear a lot of whining from people who purchase a phone for $49 and want to know why they have to sign a contract for two years in order to get it.  Frankly, I'm stumped about how to answer them politely without just saying, "Duhhhh... do you really think that phone costs just $49???"  But, my mother having brought me up to be a more polite fellow, I try to explain.  So, for the benefit of those that often wonder why they have to commit to a contract for a year or two when they purchase their phone, here are some reasons why. 

• The cost of customer acquisition is high. This can range as high as $600/customer. Generally speaking carriers do not begin making any profit on a subscriber until they are close to about the 18 month point of their service _if_ they have signed up through a promotion that subsidizes the cost of the phone.
• Phone costs are subsidized. That phone that you get for free costs the carrier money - the delta is frequently about $100 on the phone at the low end and more for the higher end products.
• This is a legacy of early contracts. Now that the carriers have embedded the idea of a lengthy contract being the norm it is easy for them to continue that momentum and keep asking for these contracts.
• The cancellation fees are being prorated by many carriers in the U.S. now and as a result exiting a contract prior to expiration is not as onerous as it once was.
• The greed factor is still relevant. Why do carriers request long contracts? In short, because they can. If subscribers resisted signing, or brought their own phones to the carrier asking for a simple activation and service, the lengthy contracts would eventually be reduced - or disappear entirely.
• Market demand. Looking at the iPhone as the prime example of this still-powerful factor we see that the simple desire to have one has not only prompted users to switch carriers and incur a cancellation feet in some cases, but to agree to a two-year contract with AT&T. Now, while I am an avid iPhone user (see my blog for comments on it and many other things mobile-oriented - link below) and paid the original retail price of $599 (yes, I did get my $100 refund in the form of an Apple store credit... and also got American Express to make up the difference on their "price guarantee" claim) I still would have liked the ability to buy the phone and the service without a long contract. That option wasn't available so I bit my lip and signed a two-year deal to get the phone (it was worth it, by the way - a phenomenal product).
  

Finally, there is a benefit here. While the carriers do require this lengthy contract, their ability to recover embedded costs of acquisition, subsidization, etc., make monthly service and per-minute prices in the U.S. the lowest in the world by a wide margin. So, while people may complain about the up-front commitment, they do get some residual benefit in the form of reduced costs.

So, no whining, please.