There were two things that recently came to my attention, that on the face of it aren’t related, but in reality were very much related. In both cases I was not happy with what I saw.
The first thing was when I learned about a new car purchase by the child of a friend of mine. I had borrowed some tools and was returning them to my friends house and there in the driveway was this brand new beautiful baby blue Mustang. It was obvious to me that the Mustang probably belonged to his child who had just gotten a somewhat permanent job at the big local manufacturing plant. I use the descriptor ‘somewhat’ because, as is the case with most modern manufacturing facilities, he was really working for a staffing agency. He’ll be with the agency until the big company decides to bring him on full time. A major reason why modern manufacturers use staffing agencies is so they can try people out first and then get rid of them very easily if for some reason or another they don’t work out.
The dad in question was excited to tell me that his son drove the car off the lot, i.e. it was brand new. He also told me his son mostly leaves it parked to keep it nice and new. I know purchasing a brand new car after landing the first real job out of school is a fairly popular American tradition and a rite of passage. The purchase says: I’m grown up! I can do what adults do! The payments are justified by the sales team at the dealership and friends and family as a good way to ‘build credit’ for future large purchases. Although I know this I couldn’t help but feel a little sad. I really didn’t like the idea of a kid that lives at home and is making payments on a vehicle that will go down in value just to have something nice as a supposed accomplishment. In my opinion the car loan, or more specifically the culturally accepted concept that you’ll always have a car payment and they are in general a good thing is one of the greatest swindles that have been foisted on the American public.
The second attention-grabbing experience I had was while I was driving and listening to a tech podcast. I love podcasts and I even have my own. Mostly I listen to shows about technology or business theory. I find these two subjects engaging and also relaxing as they generally do not tend to intersect with the incendiary and anxiety-producing news of the day out of the mainstream media outlets.
This time around I felt a tinge of anxiety and stress. The hosts were discussing the launch of the new iPhone. You would think the conversation would be about the camera, or the new processor. It could have been a spirited discussion about the changes to the interface or maybe even some of the new associated cloud services that Apple was implementing. What I found shocking and sad was that the conversation was more about payments than it was about the tech in the phone. The analysis was all about the different payment options. What was the payment with the upgraded model? What was the payment with the new elite model? What is the payment vs the other lower priced iphones ? What is the payment vs competing phones? It was just assumed that most people who purchase the phone will do so on a payment plan. The conversation the hosts were having reminded me of an interview I listened to after Steve Ballmer left Microsoft. When questioned about the failure of Microsoft’s mobile efforts and the success of the iPhone, Ballmer said that the real success Apple had was not just with the paradigm shift with mobile technology. He said the other half of the equation of Apple’s success with the iPhone had to do with the payment model they came up with. Specifically it was being able to hide the cost of the phone in the carrier payments when it first launched. People didn’t understand the iPhone was a $1,000 product, because out of pocket they were only paying $200 and the rest was hidden in the mandatory monthly data charge.
That got me thinking about the parallels between cars and phones. Were phones so much like cars now that the payment was just as important at the tech? Is America going at a blistering pace into another great payment trap that will never end? I spent the next few days really reflecting on smartphones and cars. How were they similar? How were they different? Is the outcome going to be the same?
Similarities and Differences
The first question I asked myself was how are iPhones, and really all high-end smartphones, and Cars different?
The first major difference is in the expectation of time that you will keep the device in question. Right now it’s generally accepted that you will get rid of a phone after 2 years but a vehicle can be a 5 to 10 year purchase. That means one is short term and one can be thought of as a longer term item. I think it goes without saying that even if you are ok with debt, short term needs are best handled by paying for something with cash, not a payment plan. Also cars, and when I say cars I really should say vehicles, are all designed to do different tasks. Some cars and trucks can do things others cant, ie. pull trailers, carry lots of people etc. Aside from storage, most cell phones are about the same. Some can do things more quickly than others, and some have better cameras, but they all take pictures, and pretty much run all of the apps in their respective app Store. The closest parallel to the different types of cars would be how some phones can only be used with specific service providers. The biggest difference is that you generally have to maintain a service plan with a cellular provider to get any practical functionality out of a cell phone. Aside from fuel, there is no ‘service plan’ you need to maintain so that a car continues to work.
If differences include the amount of life you expect to get out of the product and how one is designed for specific tasks and the other isn’t, then how are iPhones and cars the same? The first and biggest similarity is that we need both of them in our modern world to function efficiently. Except for very rare cases cars are needed for transportation. Cell phones are a must for for communications especially for services that are only available via apps. Another area where they are the same is that they both can be personal statements and status symbols. Both have options that can range from basic through opulent. You can get a standard LCD screen on your phone or you can get an brilliant OLED. You can get a cloth covered car seat that only reclines manually or a leather-covered fully automated seat with heaters and coolers built-in for the ultimate in comfort for your back end. They both wear out and need to be replaced with some regularity. Unfortunately, excepting for some collectors edition cars, they are both depreciating assets. The second you take on a payment plan for a phone or a car they are both typically worth less than you owe on them.
There are other similarities and differences. The point is the two product categories aren’t perfectly aligned, but there is enough alignment to warrant the question. Are payments on either justifiable?
Justifications and Swindles
As much as I hate the concept of car payments, I can think of one justification. When you have little to no money, and you need reliable transportation to work, then a small car payment for a reliable vehicle is justifiable. Unfortunately, as I said earlier, this justification has turned into a bastardized American rite of passage. One that has ballooned into twenty something’s getting loans on cars that cost one and a half times their annual income and one that makes their first major financial decision in life a financial disaster by any accounting standard. For some business, leasing can be justified the same way. Other than the payment being the only way to get reliable and necessary transportation, every other car payment is unacceptable. If you don’t have cash, you shouldn’t own the car.
So, when should you spend a crap load of money on a cell phone via a payment plan? The closest thing to a justification that I can think of is when it’s your thing. When I say ‘your thing’ what I really mean is that your into cell phones. You swap them every year, and you love to have the latest and greatest. Then the payment plans that include the automatic annual upgrade can be seen as reasonable. For everyone else, it doesn’t make sense. If you only have $200 in cash, then you should only buy the $200 phone, not use it as a downpayment on a thousand dollar iPhone. The lower cost model does 99% of what the expensive phone does and there are no $50/month payments associated just for the higher end hardware.
Yet, in both categories most people have payments, they seem to go on forever and they are high relative to what your getting. Why? Well we are all getting hustled, upsold and arguably swindled into thinking it’s a good idea. The swindle is the same. The average consumer is hooked because there is a need for the monthly payment. In the case of cars the justification for buying into the initial payment plan is the need for reliable transportation to get to work. If you don’t live in Manhattan then there is minimal chance you’ll have reliable, cost effective, and universal public transportation available 24/7. In the case of phones you can’t be connected without paying the monthly service fee that equates to a mandatory monthly payment. No matter if your under the original smart phone plans where the payment was ‘hidden’ in the bill or the current model where the payment on the phone is explicitly stated on the bill, there is a monthly starter payment involved. The swindle i’m talking about is the idea that your now in the world of payments. At this point people don’t think in terms total cost or depreciation, the entire thinking is ‘monthly cost’.
After that it’s very easy for the organization to upsell you. If your looking at vehicles, it’s incomprehensible to most consumers to buy a vehicle without A/C or automatic transmission, even if those things add 30% to the purchase price. Extend payments a year and your monthly cost only goes up $25. That’s totally worth it for air conditioning! If your looking at phones, the XL models are so much nicer and the photos they take look so much better. $10 more a month is totally worth it for great shots of the kids! The next thing you know an entire population gets hooked and the payments creep up and up, even though we don’t really need them. Don’t think it’s possible? Think cable TV. The average triple play bill is over $160 and over $200 for a triple play package is absolutely not uncommon, all this when free television is available with an antenna and no monthly payment.
What’s the takeaway for this?
Full disclosure: When I first ran into this situation it was with a family member I was responsible for, yet who was old enough to enter into a contract to sign up for payments. Without telling me they signed up for a brand new iPhone with two years of monthly payments. I really thought the decision was based in ignorance on the part of the youth. My incredulity at the idea of monthly payments for a cell phone caused a tremendous rift in the relationship that took over a year to mend. I didn’t comprehend at the time that she was just taking part in an accepted modern cultural staple: The cell phone payment. I was the oddball for saying “only buy with cash and stick to only what you need”. That’s like telling a kid out of school in their first real job, don’t buy the sports car, just get the least expensive thing you can get that’ll get you to work. That logic simply doesn’t work the second they step into the dealership or through the Verizon Wireless door.
The takeaway is this, cell phone payments are now growing into so much of a cultural norm that it’s as important a consideration as the tech or the network. The idea of not paying for a cell phone over time is as incomprehensible to some people as only using cash to buy a new car. Like cars the system is purposefully designed to get as much out of you as possible every month and to have you making those payments in perpetuity. The idea of the cell phone payment plan even rises to the level of a life trap. I could have structured this dialog as life trap article but I wanted this first article about them to really be more about the shift in culture rather than the techniques of the trap. Maybe i’ll do another one on the annual upgrade cycles and motivations behind them. For now, just know that cell phone companies have changed our culture beyond communications, and unfortunately unlike the adoption of better productivity apps, this change is not for the better.
I personally think spending a lifetime making payments on things that go down in value is asinine, but that’s me. I know that i’m in the minority and many reading this blog may disagree vehemently. If you are one of the ones who disagree feel free to give me a call and we can debate it. The one good thing is that I know I’ll be able to hear you really well with that shiny new cell phone you just got with your annual upgrade that’s allowed on your plan.
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-Mike.
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