When millions switch on their new smartphones for the first time on Christmas day, many of them will find themselves in unfamiliar but fast-growing territory.
No longer will they be tied to a two-year contract.
A growing number of consumers are moving into the world of “prepaid” — that is, no-contract plans — in efforts to save money and to feel less tied down to one company or wireless device. Once known only as the wireless plan for consumers who had bad credit or weren’t able to pay their phone bills on time, no-contract plans are becoming more popular with all consumers.
Instead of offering only one or two prepaid plans that sell bare-bones service at a higher rate, wireless companies now have a variety of prepaid plans that include texting and data options. Those options are expanding to let consumers rollover their talk and data minutes to the next month, for example.
“It was the ‘low-rent’ kind of service, but the reality is that’s not true anymore,” said Jeff Blyskal, a senior editor with Consumer Reports. “It’s become easier and cheaper than contract service.”
No-contract plans now make up nearly 25 percent of all mobile phone subscribers, according to analyst reports. The number of consumers that have wireless service without a contract has reached 100 million in 2012, up 12 percent from the year before, according to reports.
“Now that everybody has moved to a smartphone, people are saying, ‘Let’s find a cheaper way,’” said Roger Entner, a telecommunications analyst with Boston-based Recon Analytics.
For years, companies such as TracFone Wireless, Cricket Communications, and Boost Mobile, a subsidiary of Sprint, have been some of the popular providers of prepaid cell phones. Republic Wireless is now making headlines with its Moto X device that runs over wifi when possible.
The large wireless carriers are ramping up their presence in the no-contract market. Atlanta-based AT&T Mobility started up Aio Wireless in May. AT&T, the nation’s No. 2 mobile phone carrier behind Verizon Wireless, also plans to buy Leap Wireless, which owns the Cricket brand, in a deal expected to close during the first three months of 2014.
There are several reasons for the expansion of prepaid options, said Nataraj Rao, Aio’s head of business operations and strategy. A saturated smartphone market has caused consumers to want more flexibility in their calling plans. Consumers who qualify for only prepaid services were clamoring for more devices and features so they could use the Internet, apps and other technologies.
“It doesn’t mean you have to settle for bare bones,” Rao said.
Aio’s plans are at $40, $55 or $70, depending upon how much high-speed data access a consumer wants.
The switch to no-contract plans also is a signal that the wireless market is shifting its business model away from one that uses subsidized smartphones to hook customers and tie them to a two-year contract. Wireless carriers are proactively talking up their no-contract plans to get away from the notion that they force consumers to sign on for something they don’t want.
Consumers typically would pay $100, or sometimes nothing, for a new smartphone that actually costs the wireless provider $500 or more. They spend the next two years paying off that phone as part of their monthly wireless bill.
Consumers who want to stick with that same smartphone after their contract is up wind up paying more unless they call their phone carrier to remind them that they’ve paid off the phone.
“So now you can get the devices you want without having to overpay,” said telecommunications analyst Jeff Kagan, who added he thinks the days of wireless carriers subsidizing smartphones are winding down. Consumers will be able to buy the phones upfront or in monthly installments separate from their wireless bill.
Consumers still need to research and read the fine print, analysts say. Those who use their phone all of the time, stream video constantly and want the latest and greatest smartphone each time a new one hits the market are likely better off with a long-term contract.
Also the longer consumers take to replace and upgrade their smartphones, the slower the innovation cycle will be for new technology. Because consumers typically switch up their phones every two years, companies are constantly trying to come up with new technologies to make the next phone better and faster.
“The combination of heavy investments in networks and innovation in the devices are two reasons behind smartphone leadership in the United States,” Entner said. “Moving away from subsidization is threatening that.”
Cutting monthly expenses was the key reason Darlene Childers started shopping for new cell phone service. The single mother of two was about to start law school but was hesitant to switch from AT&T Mobility, once the only major carrier that provided service where she lived, she said.
“I live pretty far out in the country and so service wasn’t that great,” said Childers, a single mom of two.
Childers found Pure TalkUSA, a Covington-based wireless company that sells no-contract service only. She pays about $40 a month to talk, text and use the Internet for a plan that would have been $100 if she were tethered to a contract. She kept her iPhone when switching to Pure Talk and eventually upgraded to an iPhone 5, buying the device at cost. Pure Talk is licensed to operate using AT&T Mobility’s network.
“I’m treating it like a computer; it’s an investment,” Childers said. “Financially, not having that contract makes sense.”
Pure Talk is one example of a no-contract wireless company that got its start by going after budget-conscious consumers and those who used their mobile phones only in emergencies, and then expanded to a wider audience. Consumers buy the phones and service through the Internet; 25 percent of the business is through word-of-mouth, said Brian Rathman, a Pure Talk executive.
“We have seen the 30-something professional who can afford to buy a phone (upfront), and we’ve seen the college student who needs the ‘as cheap as possible to call home’ buy it,” Rathman said.
Verizon has expanded its no-contract options to include tablets and other wireless devices, according to spokeswoman Kate Jay. The advertised mobile phone plans are at $60 and $70 a month and include unlimited talk time and texting and some data options. The tablet plans start at $5 a day and are geared toward the consumer who already has a tablet but uses it infrequently.
“When you add on all the new devices, there’s definitely a (growth) opportunity there,” Jay said.