I recently upgraded my cell phone and discovered a lot has changed in the cell phone marketplace over the last couple of years. In this month’s blog I’m sharing some strategies to help keep your overall cost down.
I will start with the traditional two year contract. The way these contracts work is that the wireless carriers provide an upfront subsidy on the phone and in return require a two year contract. For example, a new phone might cost $600 but you will only be charged $200. That $400 subsidy provided by the carrier is an expense for the carrier, and will be recouped via the monthly charges you incur during the two year contract period.
After the two year period, you are free to upgrade to a new phone and obtain a new subsidy – or you can switch to a month-to-month contract and get a discount on your monthly bill since the subsidy has already been recouped. I don’t think many people are aware that they can do this. For us, the discount is $25 per month, per line, based on the data plan we have with Verizon Wireless. The key here is that you are going to have to ask for this. The wireless carriers will gladly let you go on paying the higher monthly charge that includes the subsidy recovery. But if you are not in a rush to upgrade your phone, you can save a substantial amount by just keeping your old phone and lowering your monthly cost.
If, however, you really need to have the latest and greatest phone and want to stay with a two year contract, then the best approach is to upgrade as soon as the contract is up so you can get the maximum value for your old phone. A vibrant secondary market has emerged for used cell phones. I recently sold my two-year-old iphone 5 on Ebay for $197 which pretty much offsets the cost of acquiring a new iphone 6 with a two year contract.
However, all four major cell phone carriers are moving away from the traditional two year contract and toward programs that separate the purchase of the phone from the purchase of a monthly plan. You are essentially paying the full cost of the phone but the carriers allow you to spread the payments for the phone over two years. In the meantime, they discount the cost of the monthly plan similar to the month-to-month program described above, since they no longer have to offset the subsidy. The four carriers each have their own names for their version of these programs (Verizon Edge, AT&T Next, Sprint Easy Pay and T Mobile Jump). TMobile does not even offer a two year contract program any longer so with them you must opt for their no contract Jump program.
Since you are not tied to a contract you can upgrade or switch to a different carrier at any time, but you will have to pay off the remaining balance on the phone before doing so. You can also add a new line using a phone that is already paid for and still obtain the monthly discount. This is one of the reasons for the vibrant secondary market for used phones. A new iPhone 5C might cost $450 but you can buy a comparable used phone on Ebay for $200.
To determine whether a two year contract is better or worse than one of the new no contract programs you need to compare the value of the monthly discount under the no contract program to the value of the subsidy in a two year contract. I’ll use an iPhone at Verizon as an example: The full retail price for a 16G iphone 6 at Verizon is $650, but the subsidy with a two year contract is $450, bringing the subsidized price to $200. There is also a $40 upgrade fee if you opt for another two year contract so the net subsidy is $410. If you go with the Edge program, you pay the full $650 for the phone (payments spread over two years) but if you are on a Verizon data plan that is 4GB per month or less, the monthly plan is discounted by $15. Over two years, that adds up to $360 which does not cover the $410 subsidy you would be giving up. In this case the two year contract would be better. On the other hand, if you are on a 6GB or greater data plan, the monthly discount on the Edge program is $25, which is $600 over the two years. This savings is greater than the $410 subsidy, thus the Edge program would be the better deal.
Each carrier has its own nuances in its programs, so comparisons can be challenging. But as a general rule the no-contract plans favor bigger families on shared plans who use lots of data.
As for cost comparisons between the carriers, the big differences tend to come in the area of data charges. You will want to keep an eye on the cost of your data plan (including overages) to determine if there is a better option available at your carrier or by switching carriers. Data overages in particular can be costly; the industry collects over $1 billion per year in data overage fees. T Mobile does not charge overage fees on domestic plans (you’ll be shifted to an older, slower network if you go over your allotment of high speed data) and also allows you to rollover your unused data and use it later in the year. However, the data allotment with T Mobile plans are not shared by members of a family, which means less flexibility. AT&T recently launched a rollover program but you can only use any unused data during the following month. Sprint tries to encourage you to opt for one of their more expensive unlimited data plans. Verizon recently lowered the cost of their data plans.
You will want to be sure that if prices for data plans come down, you take advantage of the more favorable terms. As with the month-to-month plans, the carriers will not switch you to the lower cost plan unless you ask.
In the future, the shift away from two year contracts should make it easier to switch from one carrier to another, which will benefit consumers. What will also make transitioning from one carrier to another easier will be convergence in technology. In the past, the voice networks for the carriers in the US operated on largely incompatible systems, but it is expected that all four major carriers will adopt similar LTE technology for voice calls in the future.
The other change occurring is that the carriers are starting to leverage WIFI calling to improve the cell reception inside your home. Sprint and T Mobile already make this technology available to all their customers. With Verizon and AT&T, you need to purchase an additional piece of equipment, called a network extender, in order to take advantage of WIFI calling, which costs about $250. You are expected to pay for these network extenders but you may be able negotiate a full or partial discount depending on your situation. Both Verizon and AT&T are expected to roll out WIFI calling to their entire network in the near future.
That is the update for now.