What is a subsidized smartphone?

A smartphone is considered subsidized when a consumer gets a discount on the phone in exchange for signing a service contract for a set length of time.

The service provider takes on the additional cost of the device. The reason they do this is to get a customer that will pay enough in monthly bill payments for service over the length of the contract to recoup the initial cost of providing that customer with an expensive phone.

This is why post-paid cell phone providers only allow this level of pricing every other year. If they subsidize phones more often, then they often are not making a profit on that customer.