So long cellphone contracts. Wireless carriers are phasing two-year plans out.

So Long, Cellphone Contracts. You Won’t Be Missed.

So Long, Cellphone Contracts. You Won’t Be Missed.

Moneybox
A blog about business and economics.
Aug. 18 2015 5:02 PM

So Long, Cellphone Contracts. You Won’t Be Missed.

Earlier this month Verizon dealt a critical blow to the cruel tyranny of smartphone contract plans; on Monday so did Sprint. With T-Mobile eliminating the contract option long ago as part of its “uncarrier” campaign, AT&T has quickly become the only major wireless carrier in the U.S. to still offer multiyear contracts with subsidized phones, and even it is making those plans harder to obtain.

Don’t expect to see many tears. As long as contract plans have been the norm in the wireless industry, they’ve also been the bane of consumers—particuarly those who care about having the latest device. Phone contracts sign users into long-term agreements (typically two years) and keep them there with the threat of hefty early-termination fees. Want the new iPhone when it comes out only halfway through your existing carrier contract? Pay up, or tough luck.

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So, are these new contract-free options better? The not-really-helpful answer is that it depends. If you’re the type of person who prioritizes having a shiny new device, then you probably stand to benefit from going the contract-free route. Under the “iPhone Forever” promotion that Sprint announced on Monday, for example, customers are eligible to upgrade any time they “don’t have the latest iPhone.” On the other hand, if you, like me, are happy to hang onto your dated smartphone for its two-year term, going contract-free might ultimately increase your spending. That’s because with most of these new plans, the cost of your freedom from a two-year contract is the full price of your device—either paid all at once upfront, or tacked onto your bill in monthly installments.

Whether ditching a two-year contract is cheaper or more expensive in the long run will depend on your particular plan and device. Consider Verizon. Under the company’s new pricing plan, an iPhone 6 user with 3GB of data would get a pretax monthly bill of about $92—$45 for data, $20 for the smartphone connection, and $27.08 for the monthly device payment—and can upgrade any time once she’s paid the device off. By contrast, with Verizon’s older “more everything” plan, that same iPhone 6 user would have paid $90 a month pretax ($50 for data plus $40 for the smartphone connection), as well as $199.99 for the subsidized device and $40 to either activate or upgrade. In this case, the new pricing model is cheaper because the subsidized device cost was essentially built into your monthly smartphone connection charges under the two-year contract. Still, there’s no guarantee that you’ll always save money by going contract-free.

That said, my guess is that lots of people will do it anyway because they fall into the I-want-a-new-phone category rather than the I’ll-hang-on-to-it-for-two-years one. In February, research firm Recon Analytics reported that 49 percent of Americans replaced their device every year in 2014. That was up from 45 percent of consumers in 2013. The portion of people replacing their device every two years, meanwhile, plummeted from 40 percent in 2013 to 16 percent in 2014. As you can see in Recon’s chart (above), many of those people appeared to shift to a third category—replacing their device at obsolescence. What’s unclear is whether that means they were ultimately hanging onto it for more or less time.

When you consider that trend, it makes sense that all the big carriers are hopping on the contract-free bandwagon. Phone technology improves fast, and consumers want to be able to upgrade apace. For now, it’s hard to say whether they’ll also pay a bit of a premium for that right. But as carriers compete to bring users on board—especially without the security of two-year contracts to lock them in—you can bet that costs will fall. So look forward to that.

Alison Griswold is a Slate staff writer covering business and economics.