A few recent developments have woken us from our 2-year-plan slumber. We’ve been exposed to a very inexpensive unlocked phone in the Nexus 4, and T-Mobile has decided to stop subsidizing phones. If we can get a great unlocked phone for a reasonable price, or a cheaper rate plan with an unsubsidized phone, why shouldn’t we?
Are we able to end our dependence on carriers? Would a contract-free world be better for the customers? Who wins and who loses in the current situation?
The status quo – pay the piper
Our current mobile way of getting a new phone is simple, really. We go to the store, we pick out a phone, we pay someone a bunch of cash, then we pay monthly. That’s not really different from the new way of thinking, but more on that in a minute. Right now, this has an unwelcome catch: the two year contract. That’s 24 months of your digital life tied down to one carrier. You can pay to get out of it, but there’s a heavy fine.
Then there is the upfront cost. You may go in thinking that phone is $199, but there’s more to it than that. From the start, you’re paying more than you thought. That $199 turns into $350 really quick with the taxes, fees, plan cost, etc. you typically pay for when starting a new rate plan. So, let’s take stock so far; $350 and you’re locked in for 24 months. Sound about right?
How about that rate plan you just purchased? Not bad at $79/month, but consider what you’re getting into. Not the data or unlimited text, but the cost. How quickly will $79 become $95 with insurance and hidden fees? Just what are those fees? I mean, shouldn’t the plan cover all of that? It seems it should, so once again we ask ourselves just what we’re getting into here.
Nexus 4 – a different way
The current state of Nexus 4 availability sheds light on the issue of rate plans. The Nexus 4 was a pickle for consumers, as it was only available unlocked and via the Play Store. It came with no LTE (kinda…), and wasn’t available on a carrier right away. This particular device was only available one way, via one source, and sold out in minutes across the globe.
Two things can be taken from this debacle: we like good devices cheap, and we are willing to get away from contracted service. While Google… or LG, or whomever we blame this week… may have underestimated the demand for this phone, it’s a mistake i’m sure will not be repeated. The Nexus 4 had everything working against it, and it still outperformed expectations. We didn’t like that LG made it, and we didn’t like that it had no LTE, and we hated the fact it was only available on the Play Store. Still, it made a very pointed scar across the face of mobile rate plans.
Is prepaid worth it?
An interesting conundrum, prepaid is. On one hand, you stand to save quite a bit of money with your monthly plan. On the other, you must buy the phone straight away with no subsidy from your carrier. The decision on which is best is unique to each person, so we’ll examine it apples to apples.
A tale of two plans
In this exercise, we’ll purchase a Samsung Galaxy Note 2, which is available on most carriers. In our first example, we purchase the device unlocked at $699. We will select the $60/monthly prepaid plan from T-Mobile. Over the course of two years, our cost is $2139.
Purchasing the same device subsidized from Verizon with an upfront cost of $299, we select the $70/month “Share Everything” plan. An additional cost of $40/month to connect our new smartphone to this plan brings the monthly cost up to $110. Over the course of our contract, we will pay $2939. This does not factor in the various charges and taxes associated with a contracted plan, so factor in an additional $200 or so.
Cost vs. Value
To be fair, you’re not getting the same service with both. The Verizon network is much better, so that is something you should factor in. Always check to see who has the best coverage in your area, as it may be similar from carrier-to-carrier. Your needs are what matters, both financially and with the network. There is also the point that this is for a single person, and a family plan via Verizon may save you some cash over those same two years.
However, the absence of hidden fees is the best thing about prepaid. I can count several examples across many carriers where, during the course of my contract, there were mysterious charges and subtle rate hikes to my plan, with no explanation or warning. One month my bill would be $110, the next $127. No apparent rhyme or reason, just random upcharges.
Freedom is an important factor, also. On prepaid, I have the freedom to switch carriers for any reason I like. I can also travel to another country and use my phone by simply switching SIM cards. I recently went on a trip to Japan, and was told by my carrier that my Galaxy Nexus would not work in Japan, as it’s a CDMA phone and Japan operates on a GSM network. When I returned, there was an extra $235 in charges for international roaming and data usage. Had I been with a prepaid phone at the time, I could have switched SIM cards and had no charge for simply having my phone on while using the camera.
T-Mobile is leading the way
An interesting thing happened recently: T-Mobile took charge of the mobile carriers. We’re not talking the network, or how many cool devices they have on offer. We’re talking about your plan, and more importantly, how much you pay.
Looking at the two examples listed above, it’s clear that while you may not be paying full price for your phone up front, you’re definitely paying for it over the course of your contract. All the carrier did was diversify your investment. Without a subsidized plan, you come out ahead. In fact, even if you wanted to buy a new Nexus device each year, you’re still breaking even.
T-Mobile has recently decided to stop all subsidized phone plans. It seems T-Mobile believes that explaining the overall savings to their potential customers will get them to choose wisely, and we can expect them to go after AT&T’s customer base. As AT&T is the only other major carrier operating on a GSM network, it’s easier for their expiring contracted customers to bring their devices to T-Mobile and save some cash.
Will prepaid work?
Do you like saving money? If you answered yes, then it will work. The money saved will keep people around, plain and simple. For most consumers, saving a few bucks and having the ability to play games or check email on the go is good enough. Access to LTE is a distant afterthought, as most people don’t even have access to that service yet.
On the other hand, AT&T’s CEO hinted that the market is just not interested in paying full price for a device. That may point to a lack of education (or a lack of willingness) on our part. Depending on how the question was presented, those answers could be unreliable. I think education on the matter will open a few eyes, which is why T-Mobile’s plan for educating consumers is the X-factor.
Will phone prices go through the roof?
If this trend catches on, consumers will begin to pay closer attention to what the actual cost of a device is. Right now the cost is an afterthought, or a marketing ploy to show you how much you’re “saving” by choosing a contracted, subsidized device. As the Nexus 4 proved, a device priced very competitively will fly out the door, so it actually behooves manufacturers to lower the retail price. If the Note 2 was $449 instead of $699, I am comfortable in speculating we’d see a whole lot more of them than we do now.
Does prepaid work for carriers?
It could, but that would require a shift in thinking on the part of consumers. Carriers are comfortable in simply locking you into a contract and solidifying income. Their business model is based on that formula. A shift to prepaid is a risky scenario, and one that will really test the mettle of a carrier. Do you think Sprint, which has a very spotty network in a lot of key markets, would be comfortable in people being able to leave at will?
Recently, the CEO of Verizon said he’d support a Verizon move to a system much like T-Mobile in the future. When someone of that stature applauds and openly wishes to follow suit on a radical industry change, that tells you this thing has some legs. While everyone is using T-Mobile as a bit of a crash test dummy, the positive attention should tell us that the subsidy model is probably not favorable to carriers either. Another interesting remark is that Verizon could move to a prepaid or unsubsidized model “very quickly.” We can surmise from that comment how nimble the structure of plans and subsidies is.
Is unsubsidized fair?
When we consider who needs to be happy in this equation, and that would be you and I for anyone keeping score, the answer is yes. We save money, we get similar service, and have much more freedom. On the other hand, this all has the potential to eliminate competitive practices. If the industry leveled the playing field quickly, someone has to lose.
A switch to unlocked exposes the networks, and it would be unfair to a weaker network like Sprint (and maybe even T-Mobile) if everyone were to switch to this model of unlocked, unsubsidized phones. Everyone is working hard to switch over to LTE right now, so throwing a wrench in the machine could stop a few engines.
Are there any other options?
In Europe, they have a really interesting model of “leasing” phones. You pay for the phone and plan in one monthly fee. At the end of your contract, you have a few options: turn the phone in and get another, or hang on to it until you find one you like. Both Vodafone and O2 offer this option, and it seems to be a good option for those who simply don’t want to pay anything upfront. On the other hand, you never really own the device, so you’d have to be careful not to modify or otherwise change the phone.
I can personally attest to how great prepaid is. While I didn’t get a huge upgrade in terms of network, I am saving 77% on my monthly mobile bill. That is a number that simply can’t be ignored. I’m a rare case in terms of amount saved, but not in regard to decision making.
Prepaid puts the control in your hands, where it belongs. It’s time we stop holding the carrier on high and start demanding more from them. The carriers are here to serve us, and if they can’t deliver, we deserve the right to move to someone who will. When your current contract is up, give an unsubsidized phone the once-over. When it comes to service, stop worrying about device specs and start crunching numbers. I am willing to bet you see the potential to save money, and money saved is sanity earned.