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.

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Device decisions

Hold the phone: With these price differences, why would anyone not go for a prepaid plan? Are those of us stuck in the postpaid world just flat-out crazy?

Not necessarily. Prepaid plans do have their drawbacks, and device selection leads the list.

"We're still not seeing the kinds of leading-edge devices in prepaid that would be flagships at carriers like Verizon," says NPD's Rubin.

In other words, you won't find a hot, top-of-the-line device like the Samsung Galaxy Note or the iPhone 4S (or any iPhone, for that matter) at a prepaid carrier. You will, however, find plenty of decent midrange smartphones like the Android-powered LG Marquee, available for $280 from Boost Mobile, and the LG Optimus Black, available for $329 from TracFone-owned Straight Talk. And while you might be able to get a higher-end phone for the same money from a major "postpaid" carrier, when you factor in the two-year contract and higher monthly service rates, you'll end up paying far more in the long run.

Just ask Jeromy Shepherd. A family man from Illinois, Shepherd spent hundreds of dollars on smartphones with big carriers before deciding to look into prepaid alternatives. He ended up with Virgin Mobile, where he uses an HTC Wildfire S phone and pays about $40 a month for 1200 minutes and unlimited texting and data (with the first 2.5GB at 3G speeds).

"I have cut the family cell bill to near a third of what it was with AT&T," Shepherd says. "And the math proves that the total cost of the [postpaid plans from] big companies far exceeds the upfront cost of buying the phone outright from Virgin."

Kristofer Gigante came to the same conclusion. Gigante, a high school teacher in New York, uses the LG Optimus V (which, as of this writing, sells for $100 ) on Virgin Mobile. Two weeks after he bought the device, his wife decided to get one, too.

"It made no sense to me to pay all the money people do for their contract phones," Gigante says. "For $50 a month, we have two Android smartphones, unlimited texting and data, and 300 minutes of talk each."

Some crafty smartphone enthusiasts have even found a way to use top-tier devices with prepaid prices and no contractual commitments. John Bowdre, an IT manager and self-proclaimed geek from Alabama, uses Google's flagship Galaxy Nexus phone on T-Mobile's Monthly 4G service. He's on the $30-a-month plan that includes 100 minutes, unlimited texting and 5GB of 4G data.

Bowdre's trick: He bought an unlocked GSM version of the Galaxy Nexus from a third-party retailer. He paid about $560 for the phone, got a T-Mobile SIM card -- T-Mobile allows you to bring any compatible device onto its network with a prepaid plan, regardless of where you bought it -- and signed up for service. The up-front cost of the phone may seem high, but as Bowdre realized, he was still coming out ahead in the end.

"Saving roughly $50 a month, I'll offset the purchase price of my phone in less than 12 months," he says. "What part of prepaid doesn't make sense?"

His logic is sound: If you were to buy the Galaxy Nexus with a two-year contract from Verizon, you'd pay $300 for the phone. For 450 minutes a month -- Verizon's lowest talk option -- along with 5GB of monthly data and unlimited texting, you'd fork over a total of $110 per month. Over the course of a two-year contract, that'd come out to a grand total of $2,640. Factor in the cost of the phone, and you're looking at an investment of $2,940 for the device and two years of service.

With T-Mobile's $30 Monthly4G plan, on the other hand, you're paying only $720 in service charges over the same two-year span for 100 minutes a month and the first 5GB of data at 4G speeds. With an up-front device cost of $530 -- the current (as of this writing) unsubsidized cost of the GSM Galaxy Nexus on NewEgg -- that comes out to a total two-year investment of $1,250, which is less than half the total cost on Verizon. If you can manage with the smaller pool of minutes, the potential savings are enormous even with a high-end phone.

Prepaid perspective

Before you drop everything and put all your eggs in the prepaid basket, there are a few more downsides worth discussing. Beyond the aforementioned device consideration, prepaid carriers tend to have far more limited plans than their postpaid counterparts. You typically won't find shared family plans on prepaid, for example, nor will you find the types of multiple-service discounts the larger carriers can provide.

Then there's the issue of minutes. With prepaid, you get the number of minutes you pay for, plain and simple. If you sign up for 100 minutes a month, you get 100 minutes a month -- no free nights, no free weekends, no free mobile-to-mobile calls, and no month-to-month rollovers. You can get additional minutes if you need them, in most cases, but only if you post the funds onto your account in advance. With T-Mobile's $30 plan, for example, extra minutes are billed at $0.10 each if you activate an "autorefill" feature and maintain an appropriate prepaid balance.

Some of the prepaid carriers are also smaller regional companies that offer relatively limited coverage and don't support 4G-level data. If you do decide to go prepaid, be sure to think carefully about your carrier choice and make certain the company you choose provides the type and size of network you need.

Finally, prepaid carriers may not always offer the same level of support that the larger carriers can deliver. This can manifest itself in the form of slow or sometimes nonexistent software upgrades and lower priority call handling. Of course, one could contend that the big carriers have pretty mixed track records when it comes to those areas, too, so take the contrast for what it's worth.

Ultimately, the prepaid phone market is a vastly different entity from what it was just a couple short years ago. With its expanding focus on smartphones and ever-increasing variety of plan options, the compromise it requires is now smaller than ever. It may not be the right choice for everyone, but with the way things have evolved, any smartphone shopper would be wise to explore the prepaid possibilities before habitually settling into a postpaid carrier commitment.

Check out our slideshow: 6 standout smartphones for prepaid plans.

JR Raphael is a Computerworld contributing editor and the author of the Android Power blog. You can find him on Google+, Twitter, or Facebook.

Copyright © 2012 IDG Communications, Inc.

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