Why the US is poised for off-contract shift (Smartphones Unlocked)

Better smartphone choices and greater consumer awareness are two reasons to abandon the two-year tether.

Jessica Dolcourt Senior Director, Commerce & Content Operations
Jessica Dolcourt is a passionate content strategist and veteran leader of CNET coverage. As Senior Director of Commerce & Content Operations, she leads a number of teams, including Commerce, How-To and Performance Optimization. Her CNET career began in 2006, testing desktop and mobile software for Download.com and CNET, including the first iPhone and Android apps and operating systems. She continued to review, report on and write a wide range of commentary and analysis on all things phones, with an emphasis on iPhone and Samsung. Jessica was one of the first people in the world to test, review and report on foldable phones and 5G wireless speeds. Jessica began leading CNET's How-To section for tips and FAQs in 2019, guiding coverage of topics ranging from personal finance to phones and home. She holds an MA with Distinction from the University of Warwick (UK).
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Jessica Dolcourt
5 min read
Bought off-contract, Google's Nexus 5 offers tremendous value.

For about as long as there have been cell phones, US carriers have had a stranglehold over the purchasing experience. The two-year contract has reigned supreme here in the States, with providers heavily subsidizing the cost of high-priced handsets. But for some buyers, times are changing.

T-Mobile's brassy, vocal assault on the status quo is making the retail cost of smartphones more transparent, while Google's lower-cost Nexus is a sure to lure customers away from premium-priced phones.

While the majority of phone customers are likely to stick with the contract formula, especially if they're on a family plan already, others are showing greater interest in no-contract commitments.

Phone choice: A better spread
If there's one poster phone for the no-contract experience, it's Google's Nexus 5. Made by LG, but sold off-contract in the US by Google through its Play Store and T-Mobile, the Nexus 5 loudly challenges the merits of higher-priced rivals with its high-end specs and affordable $350 cost.

Sprint and AT&T also sell the Nexus 5 on contract, but here in the US, the Nexus 5's sub-$400 sticker price is a steal for a handset that has a more up-to-date processor and OS than the Samsung Galaxy S4 and HTC One Android front-runners, the latter of which has a full retail charge that costs hundreds of dollars more.

Google's Nexus line has been a strong alternative for a few years now, but is picking up more momentum with this model, which delivers the LTE that Americans crave alongside robust features and that lower price. While it's too early to collect sales data quite yet, the Nexus 5 is in a strong position going into the holiday surge.

Beyond the Nexus 5, second-tier carriers like MetroPCS (now owned by T-Mobile), Virgin and Boost Mobile, and Cricket carry a wider range of handsets, including pricey premium options like the iPhone 5S and Samsung Galaxy S4.

Customers typically pay a lower monthly data rate, but a higher up-front cost for the phone, and can leave at any time without getting smacked by an early termination penalty.

On the Windows Phone side of the house, Nokia has been chipping away at smartphone costs, driving down the full retail price of midrange models such as the $350 Lumia 1320 phablet. While that handset isn't expected to come to the US yet, it still could find a home with these prepaid carriers.

There's also the Lumia 520, which costs $100 with a prepaid AT&T GoPhone plan, and the $120 T-Mobile variant, the Lumia 521. While both are low-end models that lack LTE, they do contain some software extras to help round out the experience.

Fiercer competition
T-Mobile deserves most of the credit for making the off-contract business model more appealing, after killing off contracts last March.

Backed by CEO John Legere's war of words, with Verizon and AT&T especially, T-Mobile is taking on the role of innovator, while others react.

For T-Mobile CEO John Legere, railing against AT&T and Verizon is a favorite public pastime. Sarah Tew/CNET

We saw this when T-Mo introduced it's early upgrade program, Jump, and we see it to some extent with installment pricing as the route to phone ownership, which includes a lower up-front cost followed by monthly payments.

So far, T-Mobile's tactics have been incredibly successful; the carrier gained 1 million customers in the third quarter, the most it's ushered in after beginning the contracts-are-evil campaign.

If T-Mobile can keep interest piqued, it can pull even more subscribers away from Verizon and AT&T, its biggest rivals. Edicts like free international texts and data for travelers is almost guaranteed to make that happen.

Although T-Mobile alone commands any changes in the tide so far, smaller prepaid carriers also have a chance to benefit as former contract subscribers become interested in other no-contract options.

Midrange good enough?
In mature markets like the US, contracts level the playing field of cost, making high-end smartphones seem more affordable and attainable. That often makes the choice to buy a premium handset simpler, since the off-contract difference is closer to $50 or $100, rather than a $200 or even $300 spread.

iPhone 5S
On-contract carriers sell phones like the iPhone 5S at close to the cost of production. Sarah Tew/CNET

As in countries dominated by unlocked, off-contract phones, even a small step toward no-contract payments could see customers happy with midrange or upper-middle phones like the Nexus 5, iPhone 5C, and HTC One Mini (if the latter weren't a carrier exclusive here) -- models that come with features that are capable, but not cutting edge.

Contract carriers retain the upper hand
Despite T-Mobile's bold appeal, there are logical reasons to stay put with contract carriers.

For instance, it takes no effort to stick around, but it does to calculate expenditures and cost savings with a new carrier home -- especially if you're thinking of moving the entire family over.

Then there's the argument that the contract does little harm if you're the type of person who will probably stick with the same provider for far longer than the two-year minimum.

There's also the handy subsidy, which gets you the phone at close to its manufacturing cost. For instance, IHS iSuppli's iPhone 5S teardown estimates the bill of materials at about $200, the same price you can buy the phone on contract. The counter-argument here, is that over the life span of two years, you'll likely spend more paying for pricier data with a contract carrier than you might with a no-contract competitor.

What say you?
T-Mobile's aspirations and agitations are clearly changing the way some US phone owners think about how they buy their phones, a position that's backed by a growing roster of robust phones that pack in a lot of robust features for a significantly lower cost. If we see a sustained step toward the no-contract option, these are two major reasons why.

Why do you stick with your particular carrier, and are you thinking of making the switch? If you've recently moved from contract to off-contract, what prompted the change? I'd love to hear your stance in the comments below.

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Smartphones Unlocked is a monthly column that dives deep into the inner workings of your trusty smartphone.