Looking for a smartphone bargain? Check out prepaid

As unlimited data plans from traditional wireless carriers go the way of the flip phone, savvy bargain hunters have another option: prepaid services that offer cool new smartphones with cheap unlimited data plans.

After months of anticipation, Verizon Wireless is expected to introduce a new pricing scheme July 7, which will eliminate its unlimited data plan. AT&T did something similar a year ago. While Sprint and T-Mobile USA, the smaller of the four national carriers, still offer unlimited data, there are signs that pricing will increase. Sprint already charges customers $10 more a month for phones that can access its 4G wireless network. And T-Mobile could be out of the market entirely in a year if its $39 billion merger with AT&T is approved.

What this likely means for consumers in the future are higher prices for wireless data. But as the big carriers put caps on their service plans and raise prices, there's a much overlooked alternative: prepaid wireless.

Prepaid service providers such as Virgin Mobile, Boost Mobile, Cricket, and MetroPCS offer unlimited data plans that can cost as much as 50 percent less than what consumers might pay from "post paid" providers, such as AT&T or Verizon Wireless. "Post-paid" means that customers must sign a contract and pay monthly for service, while prepaid customers don't sign contracts and pay ahead each month for service. In exchange for entering a contract, post-paid customers get subsidized handsets. Prepaid subscribers must pay full price for their handsets. But often consumers on prepaid plans aren't paying much more for their smartphones than customers who sign up for a two-year contract with a major carrier.

Despite these cost advantages, prepaid service providers haven't stolen many customers from traditional cell phone providers.

"We haven't seen a lot of people leaving the post paid market en masse even during the depths of the recession," said NPD Group's Ross Rubin. "But we've started to see strong growth from Boost, Virgin Mobile, Metro PCS, and the others in this market. But it's still not enough to make a dent in the traditional market."

That may be changing, as prepaid companies start targeting customers, who already have a smartphone or are considering upgrading to one with cooler, more cutting-edge devices. Increasingly, prepaid operators are able to get their hands on sophisticated Google Android smartphones at lower price points making their $50 all-you-can-eat voice, texting, and data plans attractive alternatives even for smartphone users.

"The trend is to attract the post-paid wireless switchers or people who may want to pay a little more for the device but save some money on their service," said Mick Chambers, who manages Sprint's prepaid product portfolio. "We are trying to offer great features at a great value on a phone that people are proud to carry and put in their pockets."

Prepaid's iconic smartphones
Virgin Mobile, which is one of Sprint Nextel's prepaid wireless brands, is a perfect example of this trend, which is happening across the prepaid market. Later this summer, the company is expected to introduce the Motorola Triumph, a smartphone that looks just like the popular Motorola Droid X on Verizon Wireless. Like the Droid X, the Triumph sports some impressive specifications and features, including a 4.1-inch, high-resolution touch screen, 1GHz Qualcomm processor, 5-megapixel rear camera with 720p video capture capability, and VGA for self portrait and video chat. It also runs the standard Android 2.2 Froyo software.

Virgin Mobile hasn't announced pricing for the new phone yet, but its other high-end smartphones, such as the Samsung Intercept, LG Optimus V, and BlackBerry Curve 8530 range in price from $179 to $249. And Chambers indicated that the Triumph would likely fall in this range.

But what makes its offering most attractive is the cost of the service plans. Virgin Mobile offers service plans for smartphones starting at $25 a month for 300 minutes of talk time, unlimited texting and unlimited data. The high-end package, which includes unlimited voice, as well as, unlimited text messaging and data service is only $60 a month.

Compare this with Verizon Wireless, which charges around $200 for some of its high-end Android phones, even with a two-year contract and carrier subsidy. Its voice services start at $40 a month for 450 minutes, plus an additional $30 a month for data, and another $20 a month for unlimited texting. All together, Verizon's least expensive package for a smartphone costs $90 excluding taxes and fees. Its high-end unlimited plan costs a total $110 per month before taxes and fees.

Virgin Mobile isn't the only prepaid company to offer these great bargains for smartphones. Boost Mobile, another Sprint Nextel prepaid brand, along with Leap Wireless's Cricket and MetroPCS all offer unlimited voice and data plans for $50 to $60 per month, which includes taxes and fees. MetroPCS even offers packages that include unlimited 4G LTE service starting at $50 a month. After rebates, MetroPCS's most expensive phone designed for the 4G LTE network costs $299, only about $50 more than Verizon Wireless's HTC Thunderbolt, which operates on Verizon's 4G LTE network.

Prepaid doesn't have it all
But there are trade-offs with the prepaid model. Sprint's Chambers concedes that the smartphones offered by prepaid operators will never be the hottest devices on the market. The main reason is cost.

"We'll never be able to have something like the HTC Evo 4G on our network right when it comes out," he said. "But pricing for Android devices is coming down, and we can get still get phones with cutting edge display and processor technology.

Chambers also acknowledged that there has been a bit of a stigma surrounding the prepaid market, and he said he is working hard to ensure Virgin Mobile and Boost Mobile offer phones that people want to own.

"The future of smartphones for us is to offer value and brands that people recognize," he said. "My philosophy is to put myself in the consumers' shoes. I think about which phone I'd want to put in my pocket and which phones I'd be proud to put on the table in front of my friends and family."

Still, he said he was hopeful that eventually even prepaid service providers could get their hands on the Apple iPhone. He also said that Virgin Mobile and Boost will one day take advantage of Sprint's 4G wireless network. But for now the company is concentrating on 3G smartphones.

"Personally I think as the iPhone gets on more carriers it will be commoditized," he said. "And then it will become just another device that's available on any network. (As for 4G,) we'll eventually get there, just like we moved from 2G CDMA to 3G CDMA. It's just a matter of when we feel the need to move there."

Still, NPD Group's Rubin believes that the AT&T's $39 billion acquisition of T-Mobile USA could send even more consumers toward prepaid options. T-Mobile is seen as the cost leader among the four major U.S. wireless carriers, and if it exits the market next year, as AT&T expects, many of those value-oriented subscribers may look for cheaper alternatives to AT&T.

"If we see the value player in the post paid market go away," he said, "that will create some opportunity for Cricket, Virgin Mobile, and the rest of the prepaid players."