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Cellular Contracts vs. Installments

I haven’t dedicated much time on this blog to my day job, as it were, so I thought I might try to explain something that seems to confuse a lot of the customers I interact with at the AT&T Authorized Retailer store where I work.  That subject is AT&T Next (or Verizon Edge, or T-Mobile Jump, or Spring 1UP — whatever), which is where you buy a smartphone at full retail via installment payments.

At first blush, many people wonder why the hell they would want to buy a phone for, say, $649.99 instead of $199.99 on a traditional 2-year contract.  Well, there’s a dirty little secret regarding contracts.  You’re usually paying as much or more anyway, and they offer no flexibility whatsoever.

2-Year Contracts: A Primer

Contracts began as a way to entice American wireless customers to buy into what was once a product with very little use.  I say that because coverage was thin across most of the U.S. for many years.  Now, let’s set the record straight: no phone, even crummy basic flip phones, have ever been so cheap to manufacture that a carrier could give it away.  Even back in the analog days (1G!), that was high technology for the time.  But the carriers understood that few people would be willing to spend hundreds of dollars on devices that only worked in some places.  So those carriers dangled free or cheap phones on contract but priced the rate plans high enough to make that subsidized money back.  Truth be told, there was always a misnomer about how carriers wanted to get you to get new equipment so they could lock you in.  The best customer was the one who didn’t need a subsidy for a new phone but kept paying a rate like he or she had one anyway.  The only time a carrier would jump at putting you into a contract with no reservations is back when it was okay to extend a contract just for making a plan change.  (Thankfully, those days are mostly gone.)

An Example of a 2-Year Contract

Rate plans across the industry have been a state of flux recently, but before shared data plans came about, plans were quite stable.  Here’s an example of a common plan for a single line I would have sold back then:

Nation 450: four-hundred and fifty anytime minutes, 5000 night and weekend minutes – $39.99

Messaging Unlimited: unlimited messaging – $19.99

DataPro 3GB: three gigabytes of data – $30.00

Total – $89.99/mo + tax

If you consented to a 2-year contract, you would pay whatever the subsidized price of the phone was plus a one-time upgrade or activation fee of $40.  We’ll use an iPhone 5s 16GB, since that was the most common phone I sold before all this upheaval happened.  That phone would cost you $199.99 out of pocket (instead of $649.99 at full retail), and that upgrade or activation fee would be applied to the next bill.  For the sake of argument, let’s call that purchase $239.99.  (My state doesn’t have sales tax, so I’m ignoring that consideration on phone price in these examples.)

After two years passed, if you decided to keep your phone because it worked perfectly well and you didn’t want to lock yourself into another contract, your plan price would stay exactly the same: $89.99/mo + tax.  Okay, right?

Yes.  But that’s a bad thing.

You didn’t see it in your bill, but you were paying back your carrier for that $450 subsidy on the iPhone.  Your wireless company hid it in the cost in the overall price of your plan.  This is why these companies loved it when you kept your phone past the two-years, since it was essentially free money.

An Example of AT&T Next

These days, the carriers have new plans that are specifically built to enumerate the cost of the phone subsidy.  Here’s an example of a common plan I would put someone on today, using AT&T Next:

Mobile Share Value 3GB: three gigabytes of data with rollover, unlimited calling and messaging – $40.00

Line access fee: per-line price for each smartphone not in contract – $25.00

Total – $65.00/mo + tax

Now what happens if you want the newest iPhone and you put it on Next installments? The 24-month installment price for a $649.99 phone (i.e.: $649.99 ÷ 24) ends up being $27.09 per month.  Add that to the $65 plan, and that equals $92.09.  The first thing you might notice is that this price is $2.10 more expensive per month than the old Nation 450 price of $89.99.  Over two years, that would add up to be $50.40.

Remember, however, that with AT&T Next, you are not paying an upfront, subsidized price of $239.99 ($199.99 plus the $40 upgrade or activation fee).  So, you would save $189.59 over the old plan with the 2-year contract ($239.99 – $50.40).

You can extrapolate these numbers with multiple lines.  The pendulum swings further in the favor of the customer who has a 10GB or greater Mobile Share Plan, since the line access fee is $15.00 (compared to $25, as exampled above).

The Future

Not everyone qualifies for installments, credit-wise.  As such, there are still some customers who need to either agree to 2-year contracts, buy new phones at full retail all at once, or acquire used phones instead.  But I think this will change sometime in the future: AT&T recently changed the verbiage on its installment agreements from “there is no downpayment” to “if you have a downpayment”.  Perhaps customers with less than optimal credit will be able to still enter into AT&T Next but need to put some portion of the phone cost down (which would lower the monthly payments anyway).  I can envision a scenario where 2-year contracts disappear altogether after this happens.

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Written by Michael

14 May 2015 at 11:44 pm

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