It seems cellular carriers have always had the same policy on the replacement of your mobile handset. You are generally eligible for an upgrade to a new device every two years, and it's been that way since these devices only made phone calls.
But now, with manufacturers turning out new devices almost monthly, consumers who just replaced their device often look longingly at their friends' new phones. Two years, it seems, is a long time to stick with a phone when technology is rapidly changing. Carriers have begun to offer new options when it comes to upgrades, which may or may not be in the consumers' best interest.
Origin of the two-year plan
First, let's look at the whole reasoning behind the two-year upgrade. When you sign up with a mobile carrier, you pick a plan and purchase a phone. But the carrier “subsidizes” the cost of the phone for you. The carrier says the phone costs $600 but you get it for $200.
The carrier says it pays the other $400, which is why it insists on an ironclad two-year contract. If you cancel before two years, it assesses an “early termination fee” to recoup the money it paid for your phone.
It's hard to know what the phone really costs, however. We have to take the company's word that it costs $600 but when any commodity is subsidized – think health care and college tuition – suppliers have a lot more flexibility in setting a price.
The carriers, of course, benefit from the arrangement by keeping customers locked up for two years. They haven't seen any reason to change until recently, when manufacturers sped up the product cycle and no-contract carriers became a bigger factor in the industry.
Starting Friday AT&T is rolling out AT&T Next, allowing customers to purchase a smartphone or tablet with no down payment but who agree to pay monthly installments for the device. After 12 payments, they can trade it in and upgrade to a brand new device — again with no down payment — or they can keep using their device and have no more payments after 20 months. It's available for new AT&T customers or existing customers who are upgrade eligible.
“With AT&T Next, customers can get the newest smartphone or tablet every year with no down payment. That’s hard to beat, and it’s an incredible value for customers who want the latest and greatest every year,” said Ralph de la Vega, president and chief executive officer of AT&T Mobility.
Verizon Wireless is countering with Verizon Wireless Edge. Starting August 25, customers will be able to buy a phone on the installment plan, making payments over and above the monthly service fee. T-Mobile, meanwhile, was the first to set off in this new direction, scrapping the two-year service agreement in March in favor of selling unsubsidized phones on the installment plan.
Do the math
Getting a new phone every year might appeal to a lot of consumers, but before making such a move it might be wise to do the math. You are already paying a monthly service fee that includes some of the cost of the subsidized phone on a two year contract.
Under the new installment plans being offered, you continue to pay that same monthly service fee. They aren't reducing it.
In addition, you are paying an installment fee for the new device. It might be cheaper to simply pay the early termination fee if you want to upgrade.
And there may be no reason to upgrade if you are still happy with your present phone. However, some consumers claim the carriers go to great lengths to try and make you upgrade.
“I keep getting reminders via e-amil that I am over my two-year contract and that I can upgrade,” Patricia, a Verizon Wireless subscriber from San Diego, Calif., wrote in a ConsumerAffairs post. “I've received offers to upgrade to an iPhone. I also took a survey letting them know I am not interested in making any changes at this time. It's just a big coincidence that lately when I go to pick up any incoming calls, the phone only rings once or twice and I can't pick up and then have to call the person back on my own and explain that to them. Also my phone will mysteriously light up while I'm not even using it. I feel like there are intentional games being played by this wireless company and they are trying to force me to upgrade while I'm not ready to.”
Remember that any time your upgrade any devices on your account, it resets the clock on another two-year agreement.