There’s a new trend in mobile – going no-contract. It’s being led by T-mobile, which unveiled their no-contract Simple Choice plans last March. For $50 per month, you get unlimited voice, text and data – the first 500MB at high speed. T-mobile’s plan was a major success. They added an astonishing 4.4 million subscribers in 2013. It’s been such a success, that rival AT&T launched their own no-contract Value plans in December, and I suspect that Verizon and Sprint will be following with plans of their own soon.

I’ve been off contract with T-mobile for two years now, and it’s been a liberating experience. My first no-contract phone was the Nexus One, and I’ve since purchased a Galaxy Nexus and Moto X off contract. The up front cost of purchasing a phone off contract is higher, but over the life of what would be a two year contract, I save a significant amount by paying lower monthly rates. Plus, I’m free to upgrade my phone or switch carriers whenever I want without having to pay upgrade or early termination fees.

The benefits of going no-contract

In the past, there weren’t any significant benefits to going no-contract with the major carriers. Plan prices were the same whether you bought a subsidized phone or brought your own device. In other words, you were paying the phone subsidy every month regardless of whether you were on contract or not.¬†With these new plans from T-mobile and AT&T, the plan pricing is independent of the phone price.

I’ll go into more detail below, but in addition to the money savings, there are a number of other benefits of going no-contract.

  1. You get the flexibility to upgrade your phone when you want
    No longer are you stuck waiting two years between upgrades, nor do you feel like you have to upgrade every two years. You can switch devices every 6 months, every year, or go four years (or more) between upgrades. It’s your choice!
  2. Switch carriers without penalty, or try the prepaid route
    Since you’re not locked into to a contract, you can switch carriers on a month-to-month basis based on who is providing the best deal. You can also try any number of prepaid carrier options, such as Straight Talk wireless. The prepaid providers lease space on the major carriers’ networks, so you get the same service at a more aggressive price. For example, Straight Talk wireless has a $45/month all you can eat voice, text and data plan.
  3. Swap sims, have multiple services, travel internationally
    If you purchase your phone outright, you can get it unlocked. An unlocked phone means you can swap sim cards at your convenience. This allows you to have multiple services at the same time. While not a big deal domestically, it becomes a huge deal if you travel internationally on a regular basis. You can swap sims to the local carrier of the country you are in and pay much cheaper rates for phone calls, text and data service.
  4. Easier to hand phones down, or to keep spares around
    There are some great no-contract phones, or even used phones, that can be had at attractive prices. For example, the Moto G is a great Android phone that retails for under $200. Plus, it’s easier to keep older phones as hand me downs for kids or as spares in case a phone is lost or breaks.
  5. Cheaper long-term since you avoid the “upgrade tax”
    If you keep your phones for longer than two years, then no-contract will be a huge savings. Traditional carrier plans had a phone subsidy built-in that you paid whether you upgraded your phone at the end of your contract or not. In other words, if you didn’t upgrade your phone at the end of two years, you were paying for a new phone through your plan even though you still had your old device.

There is one caveat to going no-contract for original AT&T iPhone owners – unlimited data plans. If you are on a grandfathered AT&T unlimited data plan, make sure to evaluate your monthly costs carefully before switching to a no-contract plan. If you’re a heavy data user, it may make more sense to stick with your unlimited iPhone plan.

Recommended no-contract phones

There are quite a few phones that can be purchased outright that work well on any no-contract plan. Here are the four that I would recommend:

  • iPhone 5s
    Moto G - no contract
    If you want the iPhone experience, I would recommend buying the device directly from Apple. It’s a bit pricey starting at $650 for the 16GB model, but that’s roughly equivalent to what you pay over the course of two years on a subsidized carrier contract plan.
  • Nexus 5
    Google’s Nexus line of device are among the highest performing, lowest priced Android devices. The Nexus 5 is a competitive high end device that you can purchase directly from Google for $349 for a 16GB model.
  • Moto X
    The Moto X is one of my favorite devices. It’s not the lightest, or best performing, but it has just the right mix of features, customization and size at an attractive price point of $399 for a 16GB model. You can buy it directly from Motorola and customize the colors of the device as you like.
  • Moto G
    The Moto G has to be one of the best kept Android secrets. It’s a budget phone at $199 for a 16GB version, but it performs as good as any mid range device on the market priced at double or more. I purchased this as a gift for a member of my household recently, and there hasn’t been any complaints regarding device functionality or performance. It can be purchased directly from Motorola and can be color customized through different device backings and accessories.

If you’re a real bargain hunter, you may also be able to score some sweet deals on auction sites. People who upgrade their devices on a regular basis will often put their lightly used devices on these sites at a substantial discount over what you’d pay for them new. It’s worth checking out.

Comparing no-contract plans

Below is a table that compares the total cost of the phone and service over a two year period for AT&T’s no-contract Value plan, T-mobile’s Simple Choice no-contract plan, and Straight Talk’s prepaid wireless plan. I assumed a 16GB version of each device, a single line of service, and 2GB of high speed data. I’ve also included a traditional AT&T 2-year contract plan as the last entry for comparison purposes. You may want to do a similar analysis if you use a family plan or have an account with multiple lines as there may be substantial differences compared to the table below.

iPhone 5s Nexus 5 Moto X Moto G
AT&T Value Plan (no-contract) $2,570 $2,270 $2,320 $2,120
T-Mobile Simple Choice Plan $2,090 $1,790 $1,840 $1,640
Straight Talk Wireless $1,730 $1,430 $1,480 $1,280
AT&T Value Plan (2-yr contract) $2,479 $2,380

Keep in mind that you should always take into account carrier coverage and performance when selecting a plan. In other words, if T-mobile’s service does not work in the places you frequent, then saving $500 over AT&T is pointless. Make sure that you choose your carrier on performance first, and then use price as a deciding factor if the service is equivalent. It’s worth noting, that as I mentioned above, once you go no-contract, you can try a carrier for a month or so, and if the coverage is not adequate, you can always switch to a different carrier since you aren’t locked into a long-term contract.

You should also do some research on other prepaid service options offered by T-mobile, AT&T, and the other prepaid carriers. For example, T-mobile has a seldom advertised prepaid plan that is $30/month for 100 voice minutes, unlimited text, and unlimited data. If you don’t use your phone for voice much (which describes my teenage kids), then this prepaid plan could save you upwards of $30/month.

No-contract is not a fad, it’s here to stay

As I mentioned in my mobile trends to watch in 2014, no-contract and prepaid plans will become mainstream this year. I suspect that subsidized plans will become a relic of the past over the next 2-3 years.

With the move to no-contract plans, competition among the major carriers will surely increase. I suspect they will get more aggressive on their pricing and offerings to attract and keep customers. They will also run promotions to encourage customers to switch, such as the recent announcement by T-Mobile to pay the early termination fees for customers wanting to make a change. If T-Mobile has success with this campaign, don’t expect the other carriers to sit on their hands. I’m sure they’ll be launching their own customer incentives as well.

The bottom line, the cellphone market has become saturated. The carriers are no longer battling over new customers. They have to keep their existing customers, try to steal customers from their competitors, and offer more and better services. I expect that it will make for an exciting 2014 and beyond in the mobile market as the carriers duke it out. As one of one of my favorite Star Wars characters would say: The wireless carrier wars. Begun, they have.