T-Mobile drove the first nail into the coffin of the two-year, subsidized wireless phone contract nearly three years ago, and AT&T is about to seal the lid shut. As of Friday, Jan. 8, the carrier will no longer sell phones at steeply discounted prices in return for two-year commitments.
None of the U.S. "big four" carriers force customers to sign contracts, and despite the sticker shock that can come along with paying upwards of $600 for top-of-the-line phones, consumers are much better off than they were just a few years ago. (Existing Verizon Wireless and Sprint subscribers can choose to remain under contract and receive subsidies for new phones, but this option is not available to new customers.)
New wireless model is cheaper
For years, AT&T, Sprint, T-Mobile and Verizon customers signed two-agreements and paid about $200 for the high-end devices of their choice. The option seemed like a good deal, because $200 was far less than the retail price of a new iPhone or Galaxy, which generally cost $600, depending on the model and storage capacity. However, customers were captives to their contracts and were forced to pay steep "early termination fees" if they chose to switch carriers. Upgrading to a new phone before a contract expired was also difficult.
T-Mobile broke the mold in the United States when it launched its "Un-carrier" campaign in March of 2013, and the other three largest carriers gradually followed suit.
In many cases, the new model is cheaper for consumers, because past subsidies generally masked somewhat higher monthly charges that customers no longer have to pay.
Sprint CEO Marcelo Claure told The Associated Press in September that discounted contract phones — including his own company's handsets — amount to "a gimmick, a trick. You tell people I'm going to give you a free phone, but really the customer pays in a more expensive service plan."
Today carriers let customers pay for phones on zero-interest installment plans, so the costs are spread out over many months. Of course, they still have to pay the remaining balance if they decide to switch carriers before they finish paying for devices.
New wireless model is more flexible
Consumers also have more flexibility. There's no monetary penalty for jumping ship, for example and if their phones are compatible with a new carrier's network, they can use them as they wish. And it's easier to upgrade to new phones more frequently.
The fact that consumers can now jump from carrier to carrier means a lot of interesting deals exist that are designed to tempt them into switching. Sprint, for example, will cut new customers' bills in half if they defect from any of its major competitors.
Are there downsides to the new model? Potentially. The new plans are often more complex. The major carriers now have a plethora of shared (or family) data and device plans. Each plan offers a number of options, and figuring out which one is right can be a challenge for new customers. The old, one-size-fits-all system was easy to understand, even if it wasn't ideal. And customers now pay full price for their phones, even if the costs do balance out in the end.
Overall, if you're willing to do a bit of homework, chances are the new system is better for you than a contract and phone subsidy.