T-Mobile US have shaken up the North American cell 'phone market by stopping the de facto standard two year plan approximately two years ago. Instead of customers buying a discounted 'phone with a two year plan, and effectively locked into the carrier, T-Mobile US customer pay the full price for the 'phone via a credit agreement, which is repaid back to the carrier, typically over two years. For like for like devices, overall monthly rates were kept largely the same. And whilst repaying a 'phone over two years – often known as an equipment installation plan – might seem like it's the same thing as a conventional contract, there are a number of important differences.
The first is transparency. There's no such thing as a free 'phone on a contract, instead the carrier claws back the cost of the device over the contract. That $700 smartphone might only appear to cost $200 up front but the carrier put the remaining $500 onto the cost of your plan over the following two years. At the end of the two year plan, your rate will remain the same – there is an incentive to upgrade (and get a new smartphone) because otherwise, you are now overpaying for your two year old device.
The second is the ability to reduce costs. In order to simplify the contract process, carriers tended to lump together handsets at the same contract price. This meant that mid-range and high end devices were often at the same price tier, which in turn meant that customers would typically opt for the flagship as it cost the same as the lesser model; even if they would be happy with the lesser model. With modern equipment installation plans, customers opting for a $400 smartphone rather than a $700 smartphone pay $300 less over the repayment period. Better yet, when the equipment has been paid for, this part of the bill disappears: if the customer is happy to keep the same device, they benefit from a cheaper monthly cost.
Another benefit is that customers may move carrier at any time, with the caveat that the device(s) must of course be paid for. It also means that it is easier, simpler and cheaper to upgrade the device, too: the old balance must of course be paid off but the amount left to pay is completely transparent. T-Mobile's logic is that if you give customers the ability to move carrier as often as they need to, they will be in turn loyal as they are not committed.
The smartphone industry is also changing: as smartphones are improving, they are becoming more of a commodity item for many customers rather than a luxury item. We are seeing several manufacturers introducing considerably less expensive models than in previous years in an attempt to tap into this emerging market: these devices are being marketed and sold direct to customers. Motorola, OnePlus, Wileyfox and Cubot are four examples of manufacturers shying away from carrier deals and are selling direct to customers. Although these devices do not benefit from a regular repayment plan with the carrier, they are able to use the same plans – and carriers are becoming more accommodating for customers bringing their own device to the network.
Are there any advantages to the old fashioned, legacy contracts? If you are on a very old contract you might have some perks (such as unlimited data) that mean it is worthwhile keeping it in place, but carriers have wised up to this trick and will continue to encourage customers to upgrade their device.