How your out-of-date, unsexy smartphone can save you money

As wireless operators like AT&T, Verizon Wireless and T-Mobile amend their service offerings, consumers can save big bucks by keeping their cell phones longer. But to cash in, subscribers need to make sure they're signed up for the right plan.

The good news for consumers these days is that wireless providers are changing how they do business. But that doesn't mean they've made it easy for people to figure out how to tap into those potential savings. In this edition of Ask Maggie, I explain how the new no-contract plans work and how they can benefit consumers (and carriers). I also highlight how the old subsidy model has been cutting into carrier profits.

Ending the upgrade cycle

Dear Maggie,

I bought my current smartphone with a two-year contract and now that contract is over. I know you've said there are discounts available once the phone is paid off. But I'm skeptical. I don't trust the wireless carriers. What's the catch? And if there isn't a catch, how can I take advantage of those discounts? Do I need to ask my carrier to lower my bill, or will this happen automatically?

Thanks,
Brad

Dear Brad,

You're correct that wireless operators are making it more attractive for consumers to use an older device on their networks (or to bring their own device when signing up). Traditionally, when you sign-up for a two-year service contract, the carrier will subsidize a majority of the cost of your smartphone. The actual cost of an iPhone 6, for instance, is $650, but the on-contract price is $200. But carriers aren't in the business of charity, and that $450 is bundled into your monthly service fees. If a customer breaks the contract early, they have to pay an early termination fee.

But over the last two years, the carriers have shifted away from the subsidy model and contracts, instead getting consumers to pay for their smartphones right off the bat or in monthly installments in exchange for lower monthly service fees. They've broken out the device fee and the service fee so it's clearer what you're paying for each month. Under this no-contract model, if you leave early, you pay for the full amount of a device, which replaces the early termination fee.

For savvy wireless consumers, this change in business model can result in big savings on monthly service bills, since someone with his own phone only needs to pay for the service part.

Why are carriers making the change? The traditional subsidy model has been costing them a lot of money upfront. It's no coincidence that a carrier will post a huge drop in profits, or even a loss, in a quarter when iPhone sales surge. The carriers gradually make it up over time, but they prefer to avoid the volatility.

Customers who sign up for a contract get into a cycle of upgrades every 18 to 24 months, which is typically the length of time the carriers demand before they are eligible to upgraded and pay the subsidized rate for a smartphone. Under this model, the carrier is continuously laying out money on new device subsidies.

From the consumer's perspective there is no incentive under the two-year contract model to continue using an older phone once the contract expires, since the monthly bill is the same higher rate regardless of whether you buy a new phone or not. Sure, you could save the $100 to $200 it costs to get a new phone, but if that monthly fee covers subsidies, it's more financially prudent to upgrade.

AT&T, Verizon Wireless and T-Mobile are trying to break that upgrade cycle through separating the cost of the device from the service and offering incentives to customers who use their devices longer.

And because wireless carriers also realized that many customers still want to upgrade their phones every 12 to 18 months, they coupled these new rate plans with early trade-in programs, which are designed to encourage customers to hand over their old phones. These trade-in programs are combined with a zero-interest device payment plan that allow customers to split the payment of a new phone over 18 to 24 months with the option to trade-in that device for a new one every 12 to 18 months. The big stipulation here is that in order to get the new upgrade, customers have to hand over the old phone.

The trade-in programs give carriers another way to generate revenue. They can re-sell the old device or use it as a replacement for its device insurance program. Under a two-year contract model, customers keep their phones and can later sell it, give it away or leave it in a drawer for the next 10 years.

T-Mobile was the first major carrier to eliminate the device subsidy in lieu of plans that include both service and device fees. It no longer offers contract plans to its new customers. AT&T and Verizon still offer contract plans, but they've introduced new programs similar to the T-Mobile model.

Sprint has recently introduced its Sprint Lease program and Sprint Easy Pay. But unlike the plans from the other three carriers, these programs don't actually lower the cost of the monthly service.

This change in how wireless subscribers pay for smartphones is mostly good news for customers. It still allows customers to upgrade to new devices frequently. But it offers frugal consumers who don't need the latest and greatest an incentive to hold onto their older phones longer.

So how do you get to take advantage of these discounts?

If you're a new T-Mobile customer, it's simple. As I said before, T-Mobile only offers one option now, which are the no-contract plans. T-Mobile's plans are structured so that you pay for your service and then if you've financed your phone, you pay an additional payment for your device. When you've finished paying off your phone, that device fee goes away. And then you're left with just the monthly service fee.

For AT&T and Verizon customers it's a bit more tricky. These carriers still offer their old contract plans as well as these new no-contract plans. If you're on a contract plan, you must switch over to the new plan once your contract ends. Otherwise, you will continue paying the same monthly service fee, even though you've essentially already paid for your device in full.

Unlike T-Mobile, which sells individuals unlimited voice calls and text messages and their own bucket of data, AT&T and Verizon have pushed shared family plans, in which an individual must pay for a bucket of data, as well as a "smartphone access fee" that covers the unlimited voice and text message portion. Under Verizon's Edge program, your monthly smartphone access fee is $25 a month if you get a service offering between 500MB to 8GB of data, instead of the $40 a month it costs you on the contract plan. If you subscribe to a 10GB plan or higher it will cost only $15 per smartphone, an incentive they put in place to encourage you to pay more for data.

AT&T's Next plan is similar. The discount also varies depending on how much data is in your plan. A plan with 300MB to 6GB of data will cost $25 per smartphone, while a 10GB to 100GB plan will cost $15 per smartphone. Connecting a smartphone to a data plan at AT&T on a two-year contract raises the cost to $40 per device.

Keep in mind that under AT&T's Next or Verizon's Edge, that fee will also be added to your monthly bill. And once the device is paid off, that fee will automatically disappear, just as it does for T-Mobile. You can also bring in your own phone or pay the full price of the device upfront to get the same discounts.

I hope this was helpful. And good luck.

How to play the upgrade game and win

Dear Maggie,

My mom just upgraded to an iPhone 6 from Verizon Wireless. But she still likes her Phone 5c. My question is, would she be asked to pay for the iPhone 6 in full if she doesn't use it but instead gives it to my sister? Would this affect her contract with Verizon?

Thank you,
A

Dear A,

If your mom bought the new iPhone 6 under Verizon's traditional subsidy program, then she has signed a new two-year contract with Verizon in exchange for the device. This means she is committed to paying her monthly service fee to Verizon for the next two years. If she wants to cancel her Verizon service before the two year period is over, she'll pay an early termination fee.

That said, she is free to do whatever she wants with the new device she just bought from Verizon. She can use it, sell it, or give it to your sister. The only thing that matters to Verizon under this scenario is whether your mom is still paying her monthly service fee. As I stated my answer to reader's question above, the subsidy for the phone is built into the monthly price of her service. So as long as she keeps paying her monthly bill, Verizon is getting paid for that device.

Giving away her iPhone 6 to her sister won't affect the service contract, but it will require an additional plan associated with her older iPhone 5C. That shouldn't be a problem, however, if your sister is willing to cover that service fee.

But keep in mind that because she took the upgrade, she has restarted her two-year contract. So the start date of this new contract is the day she purchased the iPhone 6 and not the date on which she bought the iPhone 5c, which means she isn't eligible to upgrade to a new phone at a subsidized rate until two years after she purchased her iPhone 6. It doesn't matter that she is using her iPhone 5C.

I hope I was able to clarify this for you. Good luck!