Escaping the Clutches of a Cellphone Contract
Looking around some of the big box consumer retailers -- like Best Buy, for example -- you can't help but notice expanding shelves of prepaid phones. Is this an optical illusion, or are we seeing a marked shift in direction toward the prepaid business model? And for those who go the contract route, how much does it cost to escape?
10/30/12 5:00 AM PT
Wireless carriers are putting more energy into prepaid. It's a normal evolution. As quality phones became cheaper, prepaid brands like Sprint's Boost and Virgin Mobile have been able to offer better phones -- even a selection of smartphones, including the iPhone. Those better products, along with the availability of 4G network speeds, have increased prepaid demand.
"Prepaid is where the growth is. The market is saturated on contracts," Jayne Wallace, Sprint's director of corporate communications in charge of prepaid brands, told TechNewsWorld.
"Register a credit card and you can have a prepaid iPhone at US$30 a month on Virgin Mobile. Boost has several Androids. All of these things have come together to create growth," she said.
"T-Mobile believes consumers today do not want a one-size-fits-all approach to service plans," said Mike Katz, T-Mobile's vice president of marketing and head of prepaid. T-Mobile was an early embracer of prepaid.
"T-Mobile customers have access to the latest devices; a fast, nationwide 4G network; and affordable service plan prices, regardless of whether they choose to sign up for a two- year contract or no annual contract plan," Katz told TechNewsWorld.
How It Works
Most two-year, postpaid contract phone plans trade you the service agreement for low handset prices. Initial handset costs can be considerably higher on a prepaid plan, because the carrier doesn't have any guarantee of recouping a subsidy.
Advantages of prepaid over postpaid -- that is, contract -- plans include no regular monthly bills, cancellation fees, or credit checks. Plus, prepaid adds flexibility -- customers can change carriers at any time, rather than waiting for a contract to conclude.
While per-minute call charges can be higher, overall monthly bills can be lower.
Common prepaid carriers simply require customers to choose a phone, buy it and activate it. They then add airtime as they need it. In some cases, existing phones can be used.
"Prepaid does appeal to a certain group, and we want to serve that part of the market too," said Mark Siegel, AT&T's executive director of media relations. AT&T is a major player in the contract market.
"Prepaid may be a great alternative if you do very little calling, too" Siegel told TechNewsWorld.
Sprint's prepaid brands are seeing an entire demographic with jobs -- so they can pay for good phones and service -- but who are credit-challenged and don't qualify for contracts, said Wallace.
Many new customers are defecting from contract to prepaid plans.
"We see where the numbers are being ported from, so we know," Wallace added.
What about canceling a contract and moving over to prepaid? What are the options?
"If the customer has fulfilled the terms of the contract, and wants to unlock a device, we're happy to do that for them. Buy the iPhone 5 at full price, and we'll unlock it." AT&T's Siegel said.
In the case of AT&T, it's possible to acquire the coveted iPhone 5 for $199 on contract, but they'll also sell it to you for $649 without a contract. The customer can then go prepaid.
For those who go the contract route, how much does it cost to escape?
"Canceling a contract before you have completed the terms of the agreement could result in a customer having to pay an early termination fee of $175 to $350," said Brenda B. Raney, Verizon Wireless' media chief for strategic marketing initiatives, products and distribution, and price plans.
"Customers wanting to go that route would have to decide based on their particular circumstances if that makes sense to them," she told TechNewsWorld.
A former postpaid customer whose contract has ended -- one way or another -- and who has an unlocked GSM phone that uses the correct frequencies can insert a prepaid SIM card.
Alternatives for networks that don't use GSM frequencies and SIM cards include purchasing a new prepaid phone.
What about unlocking an existing GSM phone yourself? How easy is it to do that rather than go through the performance of returning to the initial carrier?
"In most cases, and certainly with most new phones, it is very easy," said Darren Kingman, who runs Mobileunlocked.com, a UK-based unlocking service that will sell you device-specific unlock codes for some phones.
An unlock code is the most popular way of removing the network lock on a phone, but there are other methods. Apple iPhones, for instance, can be unlocked using the official iTunes software, Kingman told TechNewsWorld.
"Usually, if a code is being used, it is simply a case of turning the phone on with a non- accepted SIM card -- any SIM card that is from a network other than the one it is locked to -- and entering the unlock code when the phone prompts you for it," he explained.
"One of the major issues we run into is that people are assuming that their phones are locked, and then purchase a code before checking," said Kingman. "I would recommend that people simply insert their new SIM card before seeking an unlock code, and test to see if the phone accepts it or not. This could potentially save them time and money."