Cut the contract: How prepaid smartphones can save you money

Want a smartphone without the sky-high bill? America's evolving prepaid wireless market might be the answer.

Smartphones may make our lives easier, but boy, they sure do make our wallets lighter. A typical smartphone setup with one of the major U.S. carriers costs around $70 to $80 a month -- and that's on the lower end of the spectrum. So what if there were a way you could get the same kind of service for less than half the cost?

It turns out there is -- if you're willing to make a few trade-offs. The secret lies in a rapidly growing but rarely discussed segment of the smartphone market known as prepaid or contract-free service. Prepaid service has been around for some time, but in the last couple of years it's started to transform from a source of cheap, bottom-of-the-barrel phones into a viable outlet for compelling smartphones.

So what exactly do you give up by going the prepaid route and is the sacrifice worth the gain? Read on; you might just be surprised.

The prepaid evolution

The U.S. prepaid phone market started out with a simple purpose: To provide inexpensive phones and wireless service to people who were unable to secure regular contract-based accounts.

"If you look back three or four years ago, prepaid was really a destination you landed as a consumer if you couldn't pass a credit check," says Mike Katz, the head of T-Mobile USA's prepaid division.

As technology and consumer demand have evolved, though, so too has the focus of the prepaid phone market. While some carriers still strive to serve what Katz describes as the "mobile minimalist" population, much of the effort these days revolves around luring in a new generation of data-hungry subscribers.

"In addition to customers who need no contract, there's an emerging market of customers who just don't want a contract," explains Lynne O'Donnell, brand manager of Sprint-owned Virgin Mobile USA. "Consumers more and more don't understand why they have to be in a two-year contract in order to get great service with devices that are current."

The shift may not be in-your-face visible -- the big-name carriers spend copious amounts of cash promoting their contract-based plans while prepaid carriers tend to market far more conservatively -- but it is undoubtedly present. Of the phones bought in 2011, 27% were prepaid, according to market research firm NPD Group, a growth of 8% from a year earlier.

Even more noteworthy is the fact that, within the prepaid mobile market, sales of smartphone-style devices more than tripled over the past year: NPD found that 35% of all prepaid phone purchases were smartphones in the fourth quarter of 2011 compared to just 11% in the fourth quarter of 2010. Some carriers are seeing an even more extreme evolution: On T-Mobile's network, for example, a whopping 60% of prepaid phone purchases in the fourth quarter were smartphones.

"Prepaid is one of the fastest growing smartphones segments in the U.S.," says Ross Rubin, a principal analyst with the NPD Group. "It tends to be a market of less affluent consumers and younger consumers, but they are highly mobile and they live on their smartphones."

The prepaid proposition

So how does this whole prepaid thing work? In a typical "postpaid" smartphone scenario, you agree to stick with a carrier for a couple of years when you buy a new phone. In exchange for that commitment, the carrier subsidizes your phone purchase, taking as much as several hundred dollars off the cost of the device. Then you get a bill each month for the previous month's service, factoring in any add-on fees and overage charges ("ways they screw you over," to use the technical term).

With prepaid service, everything is flipped upside down. You sign no contract. You usually pay the full cost for any phone you decide to buy, with no carrier-provided subsidy. And you pay a set flat fee up front for each month's service. That means when it comes to your bill, there are no nasty surprises.

"It's a sense of control," says T-Mobile's Katz. "Since you pay in advance for your service, the idea of overages and spending more than what you signed up for isn't a concern."

In terms of cost, you can find reasonable prepaid smartphone plans for as low as $25 a month. T-Mobile's Monthly4G service, for example, has a $30-a-month prepaid plan that provides 100 minutes, unlimited texting and unlimited data; you get your first 5GB at 4G-level speeds, but if you go over 5GB, you're throttled down to a dial-up-like crawl. On Virgin Mobile, which uses Sprint's network, $35 a month gets you 300 minutes, unlimited texting and unlimited data with your first 2.5GB at 3G-level speeds.

Compared to the postpaid world, the difference is striking. The lowest contract-based smartphone plan on T-Mobile's regular service costs $70 a month; it gives you unlimited minutes, unlimited texting and a meager 200MB of high-speed data. For a more manageable 2GB high-speed data allowance, your monthly cost jumps up to $80 a month.

The other big carriers are no cheaper: Sprint charges $80 a month for 450 minutes, unlimited texting and unlimited data; AT&T charges $70 a month for 450 minutes and 3GB of data; and Verizon charges $70 a month for 450 minutes and 2GB of data. If you want unlimited texting on the latter two of those two networks, be prepared to tack on an extra $20 to your monthly bill. And if you go over your monthly data allowance, be prepared to pay extra for that, too: Instead of throttling your speeds down, as many of the prepaid carriers do, AT&T and Verizon charge you an extra $10 for every gigabyte (or portion of a gigabyte) you use beyond your limit.

Overage handling aside, the basic data allotments are fairly consistent between the prepaid and the postpaid configurations. Most midrange prepaid plans give you 2GB to 5GB of high-speed data usage per month. The comparable midlevel postpaid plans give you 2GB to 3GB. (Sprint is the one exception; it's the only major U.S. carrier to still offer truly unlimited data to new subscribers, both through its regular postpaid service and via its prepaid Boost Mobile brand.)

Generally speaking, you're no more likely to hit a data cap while using a prepaid plan than you are while using a traditional postpaid arrangement.

1 2 Page 1
Page 1 of 2
7 inconvenient truths about the hybrid work trend
Shop Tech Products at Amazon