eli5 phone companies: How do they make money when you upgrade and trade-in your phone?

Question

If I upgrade my phone and it costs $500 (billed spread over 3 years) and I trade-in my old phone and get $500 credit, spread over 3 years, how is the phone company making any money? What am I missing?

In: 3

Answer 1

They sell the old phone, they are paying wholesale for the new phone. So their cost might be $300, not the $500 you are “charged.” And they sell your phone for $200, reducing the net trade-in cost. And now they have you locked into a 3-year contract with a high marginal product margin (once they have their cell towers and other infrastructure in place, it costs almost nothing to service a new customer or 1000 new customers).