Verizon, AT&T, Sprint, And Even The New T-Mobile Are Trying To Screw You

T-Mobile announced its new "Uncarrier" strategy--no more two-year contracts, pay for the phone up front. It's a step in the right direction, but not enough. Let's ban all smartphone subsidies and contracts.

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Today T-Mobile announced that it will begin selling the iPhone 5, which is nice for T-Mobile customers, because that is a nice phone. But what’s more interesting is the new “Uncarrier” plan, whereby T-Mobile is attempting to shake up how Americans buy smartphones.

The Uncarrier plan is a half-step towards contract-free plans. You aren’t roped into a contract, as you are with other carriers. Instead, you buy a phone at full price (or pay it off incrementally) and thus get a (slightly) cheaper monthly bill. It isn’t enough; American smartphone plans are still pretty bad. But at least it’s movement towards something a little more transparent and consumer-focused.

Here’s how you normally buy a smartphone in the U.S. You pay $199 “for the phone,” up front, and you sign up (or renew) a two-year contract with that carrier. Over the course of those two years, you pay a monthly fee for your voice and data. The total price varies, but over two years, you’ll probably pay somewhere between $1,800 and $2,400, depending on your plan. Rolled into this fee, secretly, you’re paying the carrier back for giving you a discount on your phone. This is the “subsidization” setup.

It is a very dumb setup.

The iPhone 5 doesn’t really cost $199. It costs $649. Your carrier is eating the difference, in exchange for a two-year contract. With that two-year contract, you can’t switch carriers, because 1) you’ve signed a contract, which will cost you a fee if you want to break it, and 2) your phone has been “locked” to your carrier. (This is done by the manufacturer; it’s a software lock, so it can be unlocked, but it’s not easy to do.) That reduces competition between the carriers; people often stick with their carriers for years and years, because you only get one chance to switch every other year, and your old phone won’t work with your new carrier anyway. That means that it also encourages you to throw your phone away and get a new one every two years. After all, you’re paying $80 or $100 a month for this plan–why not spring for a new one if it’s being offered, since it’s subsidized to be only another $199?

This is designed to feed a cycle of consumption, and to provide the wireless carriers with stability. It’s difficult and expensive for the customer to stop being a customer, so the carrier is assured to keep getting your money.

Another problem: Half of the smartphone-owning American populace is going to buy a new phone each year. So Apple, Samsung, HTC, and the rest are on once-a-year (or less!) cycles. The manufacturers have a huge, consistent, guaranteed market. The next time you think “man, this phone sure looks like last year’s,” remember this. This is why.

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T-Mobile’s new plan is marginally different. There’s no two-year contract involved, but there’s still a subsidy option. You can either pay that $649 up front, or you can pay only $99, and then fold an overt $20 a month into your monthly bill for two years. After two years, you’ll have paid a total of $579, which is cheaper than the $649 you’d pay up front. The cheaper price and installment plan are T-Mobile’s replacement for the contract–a bribe to stay with them for two years, rather than a monetary punishment if you leave (though there might be a monetary punishment if you leave as well; T-Mobile hasn’t said, yet.) The monthly fees for voice and data are cheaper than Verizon, AT&T, and Sprint, but not by much. You’ll spend a minimum of $50 a month for 500MB of data–that won’t be enough for anyone who does more than the occasional email–and they won’t charge you for going over, but they’ll throttle your speed so it’ll be real unpleasant.

So at the bare minimum, in which you pay $50 a month and get the installment plan on the phone, by the time your not-quite-but-almost-a-contract time is up, you’ve paid $1,780. Compare that to Verizon Wireless, the nation’s most popular carrier. The cheapest individual plan for the iPhone 5 you can get is a 1GB plan, which costs $50 per month–except, you also have to get a “monthly line access fee,” which is nonsense, and that’s an extra $40 per month. Your total price over those two years, with a nice new 16GB iPhone 5? A whopping $2,360.

The alternative, here, is to just pay up front what the phone really costs, and then pay a carrier for voice and data. No contracts necessary. No subsidizing. The plans would be cheaper, because, theoretically, the price of the phone doesn’t have to be built into your monthly fee–because you’ve already paid for the phone in full.

And! No nearly-new phones thrown in the garbage just because they’re one generation old. Smartphones, especially the batteries, have to be disposed of properly; they contain metals which can cause damage to the environment. And, you know, it’s wasteful.

I’ll go even further: Your monthly fee should be pay-as-you go. Pay for what you use, not what you might use. The Karma Wi-Fi hotspot has the right idea: when you need more data, you buy more data. The idea that you need to sign up for a 2GB plan or a 4GB plan is ridiculous. Imagine if all of your bills worked that way! Pay the grocery store $500 per month, every month. If you eat out a lot that month and spend less on groceries, well, too bad! That’s just money down the drain. If you have a big dinner party and need to pay more than $500 one month, well, you guessed wrong, so the grocery store will charge you a penalty for going over.

If you paid by the GB, rather than trying to guess how much you’ll use next month, you’d pay more some months and less some months. Whether this would work out mostly depends on your usage; for heavy users, like myself, it makes sense to just spring for an unlimited plan. But not for everyone! It’s the low-data users who get screwed here; on T-Mobile’s plan, I’d use, say, 7GB a month, and pay $70 for the unlimited plan. So my cost per GB is $10. But if somebody only uses 500MB, they’re paying $50, so their cost per GB is a hundred dollars.

Installment plans for phones, like T-Mobile’s, aren’t a terrible idea. Not everyone has $649 up front that they can spend on a phone. But that’s a pretty expensive phone; our favorite smartphone of last year, Google’s Nexus 4, is sold contract-free, unlocked, just the way it should be–and it starts at $300. That’s barely more expensive than the subsidized phones.

The American system of selling smartphones discourages consumer freedom, stifles competition between the carriers, rewards reckless consumerism, and costs customers more money than necessary, all to pad profits for the enormous carriers and phone manufacturers. It is bad! Ban it, and let’s everyone just buy what we want and pay for what we use.