Two-year contracts: End to cellphone discounts means more flexibility for consumers

By on January 2, 2016
Two-year contracts: End to cellphone discounts means more flexibility for consumers

8th January 2016 is when AT&T plans to bring in their “price simplification effort” that will end the two-year-contract and the subsidies on the devices. As per an internal training document, new and existing AT&T customers will now only be able to buy a smartphone by paying full price or with a Next payment plan offered by AT&T going forward.

That’s because phone companies also reduce the monthly bill for voice, text and data services when you buy your own phone or bring a used one. Some may pay a bit more, some a bit less, but the overall bill is roughly the same. What you get in return is more flexibility in which phone you buy and how long you stay with the carrier.

AT&T’s decision comes as no surprise. In the third quarter, only 1 in 5 customers chose a contract plan when they signed up with AT&T or upgraded their phones. T-Mobile broke away from contracts completely nearly three years ago, and Verizon stopped offering contracts to new customers in August. Sprint also has been weighing dropping contracts completely.

Here’s an explanation of the changes:

WHAT ARE MY OPTIONS NOW?: Most people now buy and pay for phones in monthly installments, though you can also pay the full price upfront. You can also bring a used device, such as one from a friend or family member who has upgraded to a newer model. Sprint and T-Mobile also have leasing options.

WILL I PAY MORE?: Not necessarily so, even though you now have to pay the full price for a phone.

When you got a discounted phone under contract, you were already paying the balance in the form of fees. For instance, the full cost of an iPhone 6s is $650. Although you pay just $200 at the contract rate, the phone company passes along the remaining $450 in higher monthly fees for voice, text and data. Over two years, the $450 comes to $18.75 a month. If you forgo the contract, your monthly bill for voice, text and data is typically reduced by $15 or $25 a month. The $25 discount applies for higher data plans – usually ones you share with family members. In such cases, you’re actually better off buying the phone yourself.

If your discount is only $15, and you’re giving up $18.75 in subsidies, then technically your bill is going up slightly. What you get instead is flexibility.

WHAT DO YOU MEAN BY FLEXIBILITY?: Because phone companies were subsidizing phones, there was an incentive to get the most expensive model, even if you didn’t need that. These days, there are many mid-range Android phones that do what high-end phones did just a few years ago. If you choose one of those, you keep the savings. That’s also the case if you get a friend or relative’s old phone. More important, you’re no longer tied to two-year contracts.

If you buy a phone under an installment plan, you’re still stuck with the phone company until you pay off the phone. That said, rival companies often have promotions to pay off the balance for you. And if you pay the full cost of the phone upfront, you own the phone and can switch whenever you like. Just be aware that certain phones work on a limited number of networks, so it’s still not total freedom.

CAN I STILL GET A SUBSIDIZED PHONE?: Sprint still offers contract plans, though they aren’t emphasized and they may disappear any day. Verizon offers contracts only to existing customers who renew. At AT&T, contracts will be offered only under certain business plans.

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