T-Mobile USA gets rid of 2-year contracts, introduces 'installment plans'

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NEW YORK — T-Mobile USA is ditching plans centered on two-year contracts in favor of selling phones on installment plans.

T-Mobile, the struggling No. 4 cellphone company, is the first major U.S. carrier to break from the contract model. The company changed its Web site during the weekend to begin selling the new plans. It plans to lay out the rationale for the change today at an event in New York, which could also reveal when the company will start selling the iPhone.

T-Mobile has been losing subscribers from its contract-based plans for more than two years, chiefly to bigger competitors Verizon Wireless and AT&T. T-Mobile has done better with contractless, prepaid plans, but those aren’t as profitable.

The new plan blurs the boundaries between the two types. Prepaid plans have lower monthly fees, but the buyer usually has to pay full or nearly full price for the phones. With T-Mobile’s new plans, the initial phone-buying experience won’t be much different from what it’s like for contract plans, but customers could save money in the long run.

For instance, someone who wants a Samsung Galaxy S III would pay $70 up front and then $90 per month for unlimited calling, text and data. That monthly fee includes $20 to pay off the cost of the phone over two years.

By separating the cost of the phone from the service, T-Mobile is making its plans and upgrade options easier to understand. When the phone is paid off, the $20 fee in that example disappears. On traditional contract-based plans, the buyer is deemed to have “paid off” the phone after a certain period of time and become eligible for a new, subsidized phone, but the monthly payments don’t decline.

As before, T-Mobile’s prices generally undercut those of the bigger companies. The chief downside is that its data network coverage is poorer in rural areas.

T-Mobile stopped short of adopting shared-data plans that Verizon Wireless and AT&T introduced last year. Those plans allow all of a family’s devices to share a pool of monthly data usage. Instead, T-Mobile is selling data per line in three tiers. The talk and text portion comes with 500 megabytes of data usage per month. Adding $10 bumps that to 2 gigabytes per month, while adding $20 provides unlimited data.

A big part of the reason for the exodus of contract-signing customers from T-Mobile is that it, alone among the four national-level cellphone carriers, hasn’t sold the iPhone. That’s because its network has, until recently, not been able to offer high-speed data service to iPhones. It’s now able to do so in some cities.

It has been trying to persuade iPhone owners whose contracts have expired with AT&T to move their phones to T-Mobile.

T-Mobile is a unit of Germany’s Deutsche Telekom AG, which has agreed to merge it with No. 5 carrier MetroPCS Communications Inc. That deal faces opposition from shareholders of MetroPCS, which provides only prepaid service.

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bdouglas 03/26/13 - 08:35 am
So what happens if you want

So what happens if you want to leave before the phone reaches that payoff point? I presume you're hit with a fee for the rest of the price? Most of the new smartphones are in the $450-$600 range at full price, so at $20 a month for the phone, you're still looking at being locked in for a couple years. If you leave another carrier before your contract is up, you're hit with an early termination fee. That fee is prorated by how much time is left in your contract. So if your carrier has a $250 ETF and you leave after a year, you may have $125 to pay for your ETF. If you leave T-mobile after a year and your phone is only half paid for, you may be left with $200 to pay for your phone still. So what makes that better exactly? Seems like another way to skin a cat while the result is still the same.

WeAreAllInfected 03/26/13 - 11:35 am
Not quite...

Samsung Galaxy S III $200 one time then "Early Termination Fee will be $350 minus $10 for each full month of your contract term that you complete"
Canceling after 1 year equals $200 + $230 etf = $430 total paid

Samsung Galaxy S III $90 one time then cost of $20 for each month remaining.
Canceling after 1 year equals $90 + $240 remaining phone cost = $330 total paid

Biggest benefit is that $20 extra fee goes away after the 2 years is over. So if you choose to keep your phone an additional year then you've saved $240 by not paying the subsidy.

I'd like to see Verizon adopt something like this, but when you have the best coverage you don't have to.

bdouglas 03/26/13 - 01:43 pm
I can see that being a bit

I can see that being a bit better for people who keep their phones forever. But the majority of people I know (particularly ones wanting those expensive phones) are ready to upgrade by the time their 2 years is up anyway. Either that or the phone is about to fall apart by that point because they don't make 'em like they used to.

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