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.
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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.
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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.