Is T-Mobile's new no-contract plan really a good deal?

In this Ask Maggie, CNET's Marguerite Reardon does the math to show you how much money wireless subscribers can save on T-Mobile's new contractless service plans.

T-Mobile shook up the wireless industry this week with the introduction of its new no-contract service plans. But is the service really a good value for consumers compared to what the other big guys are offering?

In this edition of Ask Maggie, I answer that very question. A reader wants to know if he should ditch Verizon's wireless service for T-Mobile. While some people seem to balk at the notion that wireless consumers will have to "pay"for their smartphones under these new T-Mobile plans, I do the math to explain why even buying a device at full price on T-Mobile is still a better deal than a Verizon subsidized two-year contract.

And for another reader, I clarify some of the finer points of T-Mobile's device financing program.

If you are interested in learning more about T-Mobile's new plans, check out an in-depth FAQ that my colleague Kent German and I wrote earlier this week. It should answer many of your questions.

T-Mobile vs. Verizon Wireless

Dear Maggie,
I am a Verizon Wireless subscriber whose contract is up later this year. But I am considering switching to T-Mobile since they announced their new plans. I live in the Washington, D.C. area so I'd be one of the first markets to get T-Mobile's LTE. From a value standpoint, would you recommend T-Mobile or would you recommend I continue to stick with Verizon?

Thanks,
Ike

Dear Ike,
The short answer to your question is that I think T-Mobile's new service plans are a terrific deal compared with what the other nationwide carriers are offering. Still, to be fair, I must point out that T-Mobile's CEO John Legere may have exaggerated his claim that consumers will save $1,000 over two years with T-Mobile's plans compared to a plan on a competitor. As I will explain in this column, when comparing similar plans, the cost difference isn't that great. But it's significant.

T-Mobile executives claim that consumers can save big bucks with new T-Mobile's new contractless service plans when compared to services from competitors.

But there is a caveat. It's only a great value if the service works where you live, work, and travel. So the first thing you need to do is ask your friends, family, and colleagues who use T-Mobile how they like the service. As far as I know, T-Mobile has pretty decent service in the Washington, D.C. area. And you are correct that D.C. is among the first cities to get the T-Mobile's new LTE service. So that is good news for you.

I also know that if you travel outside of Washington, D.C. in some areas, you may not get such great service or any service at all. In that instance, it doesn't matter how much money you can save with T-Mobile's new plan. It's not a good deal if can't make or receive phone calls or update your Facebook page when you are out of town for a weekend.

But let's assume, that most of the places where you travel in and around D.C. and other parts of the country get decent T-Mobile coverage. If that's the case, I don't see any reason why you shouldn't switch right now.

Before I go further, let me just preface this by saying that I don't know how much you currently pay for your Verizon Wireless service, since you didn't indicate that in your question. So as I run the numbers and compare the services, I am going to compare T-Mobile's new plan with Verizon's current plans that it sells to new wireless customers. If you have a different plan, you will have to compare the pricing yourself to see how much money you could save.

The comparison

T-Mobile's plans start at $50 a month for unlimited voice and text messaging service. At that price you get 500MB of data at full 3G/4G speeds. If you exceed 500MB of data in a month, you aren't charged an overage fee. But the speed of your service will be slowed until the beginning of the next billing cycle.

Meanwhile, the least expensive service from Verizon is $90 per month ($50 for 1GB of data and $40 for a smartphone.) If you exceed the 1GB of data in your plan, you will be charged overage fees. Overage fees start at $10 for 1GB of data.

But let's compare apples to apples and see what the price difference is between the two services. Let's say you want at least 2GB of data at full 3G/4G speed. On T-Mobile's new plan that service will cost you $60 a month. Verizon's service is $100 for 2GB of data ($60 for 2GB of data and a $40 smartphone fee.)

The difference in cost between these two plans is $40 per month. In one year, you will save $480 on the T-Mobile plan. (If you're willing to live with 500MB plan and possibly get slower service when exceed 500MB of data, you could save $600 in one year.)

Of course, this comparison does not account for the fact that you need a phone that can operate on T-Mobile's network. Verizon uses different technology for its voice services, which are not compatible with T-Mobile, so your old Verizon phone won't work on T-Mobile.

As we compare the cost of adding a new T-Mobile device into the mix, let's assume that you would upgrade your device on Verizon too. And I'll use the iPhone 5 as an example.

T-Mobile If you buy a new iPhone 5 from T-Mobile, you can either pay full price for the phone when you sign up for service, or you can pay for the device in monthly installments over 24 months. If you pay over 24 months, you will tack on another $20 a month to your service. But in reality, it doesn't matter whether you pay for the device upfront or if you pay for it over 24 months. The cost of the device will be the same, since T-Mobile is offering zero percent financing.

Let's say that you want the 2GB data service from T-Mobile and the 16GB iPhone 5. The cost of the phone is $580. And the service fee is $60 per month. Over two years, you will have paid $2,020 for the iPhone 5 on T-Mobile's 2GB plan.

Verizon A brand new 16GB iPhone 5 on Verizon costs $200 if you agree to a two-year contract. The 2GB service is $100 per month. This means that over two years, which is the standard contract period, the total cost of ownership on Verizon is $2,600.

The result: In just two years, you will be saving $580 by using T-Mobile instead of Verizon. But the savings don't stop there. Regardless of whether you financed the iPhone over 24 months or you paid for it in full when you bought it, after two years, the device is paid for. And you are no longer paying your carrier for the device.

Bottom line

When you compare the total cost of ownership between the two carriers, it's easy to see that you will save hundreds of dollars with T-Mobile over the course of a typical two-year contract.

I think some people are confused by the fact that T-Mobile is requiring customers to pay for their phones. But the reality is that every carrier makes its customers pay the full price of their phones and then some. You may only be paying $100 or $200 for a new phone when you sign your contract. But over the life of your contract, you are paying for the device, since that cost of the carrier subsidy is bundled into the price of your monthly service. And if you leave your contract early, you are socked with a hefty early termination fee.

The biggest difference between T-Mobile's plan and the rest of the carriers is that with T-Mobile once you're done paying for your phone, your out-of-pocket expense goes down. Meanwhile, Verizon and other carriers that subsidize phones continue to charge the same service fees they charged when they were recouping the cost of the subsidy. What this means is that once you have paid back the cost of the subsidy, the portion of your monthly bill that had paid for that subsidy is now profit for the carrier.

What's more if you bring a device you already own to the network or you buy an unlocked device at full price to use on that network, you will pay the same monthly service charge as someone who bought a subsidized device.

I am the first person to admit that I don't trust wireless carriers. It always seems like they are trying to squeeze more cash out of their subscribers. But when I look at the new T-Mobile plans, I can honestly say that I don't think T-Mobile is cheating anyone.

The reality is that no carrier can afford to give devices away for free. That doesn't make good business sense. But the subsidy model that we're all used to in the U.S. only encourages customers to tie themselves to two-year contracts. And it penalizes customers who either want to keep an existing device once their contracts expire or want to buy unlocked devices at full price. Meanwhile, T-Mobile's plans will encourage people to either keep their devices longer or search for the best deals on new phones. And as a savvy bargain hunter and self-professed cheapskate, I think that's great.

The only reason that I am not signing up for one of T-Mobile's new plans right now is because its service isn't available everywhere I travel. If it were, I'd be first in line for this service.

I hope this advice was helpful. I hope you save a bundle!

Is T-Mobile's device financing flexible?

Dear Maggie,
I am pretty excited about T-mobile's new service plans. I have been a long time prepaid customer with Virgin Mobile but have long been disappointed with the selection of phones they offer as well as those phones being locked to Virgin. What T-mobile has come up with in my view is a good compromise between pre and post paid payment models.

That said, I am still confused about a couple things regarding the cost of the phones. It appears that T-mobile allows you to either pay full price for the device and forgo any monthly payment, or you can pay a low upfront cost with payments broken up over the course of two years.

My question is will T-Mobile allow you to either lower the payment or lesson the term by paying more upfront? For instance could I pay $250 for a Blackberry Z10 instead of $100 to lower my monthly payment or to have a shorter payment term on the phone? Also, will Tmobile allow customers to pay off phone sooner than two years all at once if they so desire?

Thanks for the clarification, and keep the great column coming!

Thanks,
Dave

Dear Dave,
You can put more money down when you sign up for the service, but T-Mobile will not allow you to reduce the monthly payment.

That is a set price depending on the device you buy, a T-Mobile spokesman told me. That said, if you increase the down payment, you will pay off the device in a shorter period of time. As an example, if the BlackBerry Z10 costs $580, and you put $250 down, you'd pay the regular $20 a month fee to T-Mobile for 16.5 months instead of 24 months.

Also, you are free to pay off the balance on the device at any time during the finance period. In other words, let's say you put $100 down when you bought the phone, you could pay the remaining $480 anytime you like and there is no penalty.

I hope this answered your question. And good luck.

Ask Maggie is an advice column that answers readers' wireless and broadband questions. The column now appears twice a week on CNET offering readers a double dosage of Ask Maggie's advice. If you have a question, I'd love to hear from you. Please send me an e-mail at maggie dot reardon at cbs dot com. And please put "Ask Maggie" in the subject header. You can also follow me on Facebook on my Ask Maggie page.

 

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