How to Avoid Cellphone Gotchas

With family plans and megabyte-hungry smartphones and tablets, wireless costs have skyrocketed in the past three years. Nearly half of consumers now spend $1,200 or more annually on their cellphone bills, according to a survey conducted last year by Harris Interactive. That means it’s worth the effort to poke and prod on a regular basis looking for a cheaper option. You can probably find one. Change is afoot in the industry.

As we’ll see in a moment, to avoid paying more than they need to, consumers should rethink how they agree to cellphone service: they aren’t buying phones, they are buying data. But first, a surprising bit of good news.

The past several months have seen a shift in cellphone pricing models that together represent the most dramatic change to wireless pricing since the introduction of the iPhone. While there’s confusion, there is also opportunity. We’ll discuss the three major changes first, then make specific recommendations that can take a big bite out of your bills.

T-Mobile, the also-ran of the big four carriers, is behind most of the changes. Let’s hear it for competition! (Thanks, Justice Department, for blocking the T-Mobile, AT&T merger.)

The End of Early Termination Fees

Well, sort of. All the major carriers now offer plans that let you finance new phones through monthly payments, rather than giving you the gadget upfront but extracting a pound of flesh if you break your contract. This isn’t strictly speaking a cost break for consumers, but it is a risk-mitigator (no more surprise $350 fees!) and it’s a heck of a lot more honest way to charge for cellphones. If you leave your carrier, you have to finish paying the price of the phone, whatever that is. That’s fair.

Quicker Upgrades

Break #2 is tightly connected to Break #1. In July, T-Mobile introduced JUMP — “Just Upgrade My Phone.” Consumers who finance their phones can turn them in early and get a new one every six months. Sounds like a great deal! And it is, with a few catches. The big one: you don’t get to keep your old phone. You trade it in, meaning you lose whatever you’ve invested in it. T-Mobile has done the clever calculation to realize used smartphones have resale value that most consumers don’t or can’t monetize. The big plus: financing the phone this way also acts as phone insurance. Your two annual upgrades can be used to replace a broken or stolen phone. Here, too, there is a catch: Consumers must pay a hefty deductible, as they do now for insurance.

All the other carriers have since mimicked T-Mobile’s clever JUMP program. Their popularity among consumers remains to be seen, but Verizon, Sprint, and AT&T were clearly afraid they’d cede the gadget-conscious crowd if they didn’t act fast.

Truly Global Service

Anyone who’s used a passport in the past five years knows the pain of international cellphone charges. Again, T-Mobile has thrown that market into chaos by announcing recently it was ending international roaming charges. Users can call, text and download at normal prices — but at reduced speeds. Higher speeds can be purchased, however. So far, the other carriers have yet to respond.

While none of these breaks may apply to you, the disruption in pricing models will eventually impact you, particularly in the crucial area of data charges. Can T-Mobile ride a wave of consumer-friendly pricing to relevance? It’s too early to say, but the No. 4 carrier is gaining customers for the first time in years. If the gains continue, fundamental change may hit the cellphone industry, and that would be a welcome upgrade.

Wireless pricing has always been fundamentally unfair, designed to force everyone to overpay. Generally, consumers are required to buy service they don’t need as insurance against a costly extreme event. First, it was minutes — buy 1,000 minutes every month, even though you use only 500, because one month you might have a crisis and use 2,000 minutes and be hit with a $150 bill. Today, it’s data — pay Verizon the extra $10 monthly for two more gigabytes of downloads, because excess gigabytes after the fact cost $15 each. Data costs the wireless firms the same whether you pay for it this month or next, so why should Verizon be able to triple the price based on time? That’s Gotcha Capitalism.

Once upon a time, it could be claimed that wireless firms needed the predictability that came from requiring consumers to declare upfront how much network they needed. That’s silly today.

Competition is beginning to put a chink in the armor of these pricing models, too. As it did with call-only feature phones, prepaid smartphone service from aggressive startups like Straight Talk is starting to gain traction.

Think Like a Wireless Carrier

You can save money by thinking like a wireless carrier. Recall that early upgrade plans are funded in part by carriers recognizing the value of used smartphones? The 50% of Americans who now have smartphones should come to the same conclusion. Most 4G smartphones are good enough for most consumers to read email on the go, browse the Web and use basic apps. Once you’ve finished paying your contract dues, you are a free agent. Stay that way. Take your used phone and try a “bring your own device” plan from a carrier like Straight Talk. (T-Mobile offers a competitive plan, too). You’ll probably be able to turn your $100-a-month bill into a $50-a-month bill. Now that’s real money.

But note: These alternative carriers all ride along the networks owned by the big four, so the service is only as good as the coverage in your area. Also, these sellers don’t offer true unlimited service: Straight Talk, for example, throttles users down to painful 2G speeds if they use more than 2.5 GB in a month.

What Kind of Data User Are You?

A minority of Americans — 35%, according to Pew — still have “dumb” or “feature” phones. That crowd is best served by simple prepaid plans. There are plenty: Here’s a nice chart, courtesy of Best Buy. If you want to stay traditional, the top carriers all have $40-$50 monthly call-and-text plans.

For the rest of cellphone users who are part of the smartphone revolution, it’s critical to use this logic — you aren’t buying a cellphone plan, you’re buying a data plan. Compare accordingly.

First, that means you must first establish how well a carrier’s service works in the three places you most need it — at home, at work and along your commute. Don’t ask the carriers, ask your friends.

Next, decide if you are a light, medium or heavy data user. That’s tricky — most folks move from less to more, as they discover apps that they can’t resist (mine is my SlingBox — I have to watch my hockey games away from home!). There are numerous ways to pick one of those buckets, but they are all imprecise. Here’s a healthy guideline from the Illinois Consumers Utility Board. Know this: all carriers offer data plans so meager (300-500 Megs a month) that you should ignore.

Here’s my guidance: Light users who promise to never watch video on their phones can get away with 1 or 2 GB. Medium users who might watch 1-2 TV shows or games per month, or download a lot of email with attachments, need about 5 GB. I (and my hockey games), and my frequent use of tethering to get my laptop online, need 10 GB.

Beyond that, you should really use Wi-Fi more often.

Comparing the Plans

While plenty of carriers say they offer unlimited data, almost every plan comes with asterisks now — even the consumer-friendly prepaid plans — so no one gets out of doing these unpleasant data guessing games. To keep things simple, I’ll compare only light and heavy plans.

T-Mobile has the cheapest data-hoarder plans of the large carriers. For $70 (plus fees) you get unlimited phone surfing, and you can tether (capped at 2.5 GB). For $60 (plus fees), you get 2.5 GB on the phone. For either price, you’ll also have to buy a phone or finance one for $100-$200 upfront and another $20-$30 monthly.
Verizon, which tends to have the best coverage, has the most expensive plan. You can’t really get a working Verizon smartphone plan for under $100 monthly. All Verizon smartphones now require a poorly-named “share-everything” plan, even if you are sharing the data only with yourself. The Verizon guys charge $40 per device, and $60 for 2 GB, for a total of $100 (plus fees). A 10 GB plan and phone costs $140.
AT&T’s plans are a pinch cheaper than Verizon’s. For example, a 2 GB plan costs $45 for the phone and $50 for data, or $95 total (plus taxes). A 10 GB plan costs $30 for the device plus $100 for data, or $130.
Sprint was the cheapest service until T-Mobile began offering a new set of plans. Sprint gets credit for simpler pricing models. Unlimited data costs $80, and you can add 5 GB of tethering for a total of $110.

Cellphone Savings Tips

Do a two-year cost assessment. If you don’t bring your own phone, all these plans have various ways of representing the (very high) cost of the phone purchase. The best way to compare services is to sketch out the full cost of your commitment. For example, Sprint might give you a “free” iPhone 5c, but you’ll be locked in for two years at $80 per month. Total cost: $1,920 plus fees. T-Mobile’s $70 per month deal sounds appetizing, but an iPhone 5c costs $50 upfront plus $20 monthly financing, for a grand total of $2,210. The T-Mobile price does include some tethering, the flexibility of JUMP/insurance, however. And, if you bring your own phone, T-Mobile is less expensive.

Family plans. Given all the permutations possible with family plans, it’s very hard to generalize which is the cheapest. All carriers have different ways of tacking on per-phone charges, and most of them magically end up costing about the same. For example: Verizon charges $40 extra for each device, but allows family phones to share data. Get four phones and a 10 GB shared plan, and the cost is $260 (plus taxes). Shared data can be cheaper, but it also creates a great risk for overage charges. At Sprint, phones two, three and four cost $40, $30, and $20 extra, plus data costs. To get unlimited data on each device, the cost would be $80+$70+$60+50, or …. $260. See how I did that? Here’s a good summary of family phone plan charges.

Discounts. Many carriers offer discounts for affiliations, such as an employer. If you aren’t getting one, stop reading right now and Google your employer name, your carrier name and discount. Many firms have negotiated generous 15%-25% breaks. Ten minutes’ work could easily save you $250 a year. Also, make sure you know how to quickly learn how much data you have used during the month. Many carriers let you switch data plans during the month. Remember — paying ahead of time is cheaper than paying after the fact. Paying attention (or even using phone software to warn you) can save you from bill shock later.

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