Two-Year Phone Contracts Are Going Away — And That's Good For You

Senior Editor
Updated

Pretty soon, you'll have as much chance of finding a dodo in the wild as you will a two-year contract with a cellphone service provider. But for mobile phone users, that's probably a good thing.

The latest carrier to kick two-year contracts to the curb is Sprint, which told The Wall Street Journal in an interview that it's shifting toward a model where customers pay a monthly fee to lease their phones from the carrier. Sprint CEO Marcelo Claure told the Journal the carrier would completely shift to a leasing model by year's end.

Sprint unveiled the first step in that shift today (August 17) when it announced its iPhone Forever program. For $22 a month, Sprint customers can lease an iPhone, upgrading to the newest Apple smartphone whenever an update comes out. That $22 fee is in addition to the cost of a data plan, so a Sprint customer would pay $60 a month for unlimited data along with the $22 leasing fee.

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As part of the new program, new and existing Sprint customers can get a $15-a-month leasing fee when they turn in their current device. That $15 monthly fee remains in place even when they upgrade to a new iPhone before the end of the year -- handy, since Apple is widely expected to release a new version of the iPhone next month. After January 1, 2016, Sprint customers who upgrade to a new iPhone will pay the regular $22-a-month fee.

Sprint's iPhone Forever plan takes a page out of T-Mobile's book. Earlier this year, the Uncarrier announced a plan to let customers leasing their phone from T-Mobile upgrade their device three times a year. T-Mobile has also locked in a $15-a-month leasing fee for iPhone users, even after they upgrade to the next edition of Apple's smartphone.

Then again, it's not surprising to see another carrier do its own spin on T-Mobile's maneuvers. After all, T-Mobile signaled the beginning of the end for two-year contracts when it introduced no contract plans back in 2013. Verizon has also pulled the plug on two-year contracts, rolling out new pricing that either requires you to buy your phone outright or through an installment program with the carrier.

That leaves AT&T as the holdout among the Big Four carriers to still offer two-year contracts. Even after revising its data plans last week -- the carrier reduced the number of data tiers it offers and charges the same rate for individual and family plans -- AT&T continues to give subscribers the option of buying a subsidized phone with a two-year contract.

But even two-year contracts aren't in AT&T's long-term plans. AT&T has stopped offering subsidized phones through third parties, and AT&T CEO of mobile and business solutions Ralph de la Vega told Recode in June that two-year contracts were on their way out.

It's not hard to see why carriers are eager to rid themselves of two-year contracts. While such contracts lock in subscribers, they also force the carrier to offer heavily discounted prices on phones to get customers to make that two-year commitment. Carriers recoup that cost over time, but would prefer to get that money upfront or in steady monthly installments.

But ditching two-year contracts is a smart move for most customers, too. Yes, a contract means you'll pay less upfront for your phone. But you're tied to that device and the carrier for at least two years. In that time, you'll typically pay higher access fees -- AT&T charges subscribers on two-year plans $40 per device in monthly access fees while customers on installment plans pay either $15 or $25 per month depending on the size of their data plan. And your bill won't go down after that two-year contract expires, while customers on a monthly installment plan will see their monthly device payment disappear after their phone is paid off.

The bottom line? Two-year contracts may soon be entirely extinct. But don't expect either carriers or customers to mourn their loss.