Time to Do the Math and Switch to a Prepaid Smart Phone?

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The number of smart-phone users electing to skip the locked-in two-year contract and instead go with a prepaid plan is on the rise. But considering how much consumers stand to save by switching to prepaid — easily more than $1,000 over two years’ time — the increase isn’t nearly as sharp as one might expect. How come?

According to data from the research firm NPD Group, smart-phone sales grew by 9% in the second quarter of 2012, and that growth is almost entirely attributable to the rise of prepaid smart phones, which rose 91% year over year. By contrast, sales of smart phones sold the traditional way — a cheaper, subsidized handset combined with a locked-in contract from a provider like AT&T or Verizon — have essentially been flat.

“Prepaid smart phones are no longer just cheap, also-ran options, focused on older and less capable phones,” Stephen Baker, vice president of industry analysis at the NPD Group, said in a press release. “As the smart-phone market matures, and as growth slows, carriers have been smart to aggressively market some of their best current smart phones on a prepaid basis to a new set of customers, in order to keep sales humming along.”

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But are manufacturers and wireless providers actually marketing prepaid phones “aggressively,” as Baker states? Not at all, says one analyst quoted by the New York Times’ Bits blog:

“They deliberately don’t market their prepaid plans,” said Jan Dawson, an Ovum analyst. “They want you on postpaid plans that deliver higher revenue per user, on contracts that are going to lock you in.”

After doing the math comparing prepaid vs. contract, it’s clear that the former offers the possibility of saving $1,000 or more over the course of a typical two-year contract. The Times post, which is focused on explanations for why prepaid plans aren’t more popular, estimates that in two years’ time, an iPhone owner would pay $1,370 less by choosing a Virgin Mobile prepaid package over a similar contract plan from AT&T. For that matter, AT&T and Verizon, which undeniably have better coverage than cheaper providers, also offer many smart phones with prepaid plans, and they too come with the opportunity to save compared with two-year locked-in contracts.

(MORE: The New Math on Smart-Phone Plans and Providers)

So why aren’t more consumers shifting to prepaid? Given the relative absence of marketing, they might not know it’s a possibility. There’s also general consumer inertia, the human tendency to just stick with whatever you’ve got to avoid hassles, having to make decisions, trying something new or using your brain much at all. But sticking with a wireless provider and a plan just because you’ve always stuck with it essentially is a decision — and a potentially costly one at that.

For many smart-phone buyers, the pricing of phones and plans also throws them off. Some are immediately turned off by the high retail price of an iPhone that works on a prepaid basis — it’ll cost $650 via Virgin Mobile, compared with $200 from AT&T — despite the fact that some simple math shows that the prepaid phone costs much less in the long run. Tero Kuittinen, an executive with the cell-phone management company Alekstra, offered some analysis of consumer behavior to the Times:

“Right now, consumers don’t do the math, and they have a lot of resistance to paying $500 to $600 upfront, and they’d rather pay $100 upfront and then overspend,” he said. “That psychology has worked for hundreds of years, and it’s still working.”

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What’s more, as an All Things D post points out, despite the fact that the iPhone and other top-notch smart phones became available on a no-contract basis this summer, there’s still a lingering perception in the marketplace that prepaid mobile is all about “cheap phones with limited service options for people with bad credit.”

Indeed, the majority of prepaid smart-phone buyers do fall into the low-income demographic. According the NPD Group, 71% of consumers who purchased prepaid smart phones in the second quarter of 2012 had incomes of less than $35,000, a 12% rise from the same period the year before.

(MORE: 10 Things That Cost Way More Outside the U.S.)

These individuals may be turning to no-commitment phones because they don’t have the money or credit to qualify for a traditional contract phone. Then again, they may just be looking over the options, doing the math and realizing that they’ll spend less in the long run with prepaid. More and more, it makes sense for consumers of all income brackets to likewise re-evaluate. Might be smart to do a little math too.

Brad Tuttle is a reporter at TIME. Find him on Twitter at @bradrtuttle. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.

6 comments
Cute_Manager
Cute_Manager

You can't compare the cheaper (awful, low coverage) of a totally different carrier... to that have a more expensive top-rated carrier with excellent nationwide coverage... and say "gee, see, the prepaid is so much cheaper! "

That has NOTHING to do with "the prepaid plan".  You are paying a little less because you are getting FAR less quality.

time,com should have compared 5 carriers... to the SAME 5 carriers... just comparing ONLY prepaid and postpaid.

flux8
flux8

After 4 years of being with ATamp;T on an unlimited data plan, I finally dropped it in March, bought an unlocked iPhone 4S for $650, and switched my number to a T-Mobile monthly prepaid plan.  My former plan with ATamp;T was costing me $100 a month of which ~$15 was taxes and fees.  My new plan with T-Mobile costs $30 a month; no taxes, no fees, no contracts.  So in October, I will have recovered the entire cost of the phone.  

I found a few minor compromises in going to a prepaid plan.  The plan I chose (which I can change at any time) includes 1500 minutes of talk, 1500 texts, and 30 MB of data.  T-mobile hasn't set up 1900 MHz 3G in my area yet so I don't get 3G data.  But I realized that most of my data usage was at home or at work on a WiFi network anyhow.  So as long as I'm willing to avoid checking my e-mail frequently while I'm out, I'm fine.  It's a little bit of a sacrifice, but definitely more than worth it for the savings.    Also, visual voicemail on the iPhone doesn't work with T-mobile - it just tells you that you have voicemail but you have to dial in to find out who.  It took me about 5 minutes to adjust.

Bottomline: after 2 months on the prepaid plan, I wondered why it took me so long to switch. It should have been a no-brainer. But I think the large upfront investment is what held me back mostly. The phone companies probably know this which is why they offer the subsidies to lock you in.

Bilal Omar
Bilal Omar

Interested in paying $49 for unlimited 4G Talk, Text, and Data with no Contract? Check out Solavei! For an invitation send an email to thenewroxyshow@gmail

AWM1983
AWM1983

I have been counting the days until my Sprint commitment ends. It would be one thing I could actually use their "unlimited" internet at home for my computer and consoles, but that would require paying more for a LIMITED data hot spot fee. That would put me over 120 bucks per month just to send a few texts, upload pictures to face book and play a little multiplayer. NOT WORTH IT. I am better off flashing my OG Evo to Cricket or Boost and getting home internet service. The new EVO looks great but I have no idea when Sprint will roll out LTE to Denver (a flagship WiMax city) and the thought of another 2 years a $100 per month in addition to some of the worst customer service I have ever had to endure makes me sick to my stomach and that doesn't include the cost of my existing customer upgrade. Lets all send the big for a message, we want to be able to use these devices that you advertise to their fullest  abilities. Give us unrestricted Hotspot use on our phones with unlimited data and we will continue to pay your existing prices. If not, pre pay is calling my name...

Lane1
Lane1

I use Straight Talk and their lack of advertising makes me wonder if what they do is 100% legitimate, or if they have an agreement with ATamp;T not to advertise.

I'm not knowledgeable about the regulations surrounding MVNOs, but it just seems odd that they're able to give you a sim card that lets you be an ATamp;T network user with a high-end phone for way less money, and yet they aren't well known.

counterblow
counterblow

it is perfectly legit and they do advertise.  it is just that their TV commercials are so odd that you probably saw one and didn't realize it.  The other thing is that it is exclusive to Wal Mart and online so that limits market penetration.  You have heard of Net10 right?  They have the same plan and they are sold everywhere.