How Competition Changed Cellphone Plans

(Flickr / Mike Mozart)

(Flickr / Mike Mozart)

This week, AT&T will drop two-year contracts for mobile phone customers, following the lead of Verizon and Sprint in August and T-Mobile in 2013.

Buying a cellphone used to be a frustrating process. Unless you could fork over hundreds of dollars upfront, you’d buy a steeply discounted device in exchange for locking yourself into a two-year contract.

Cancellation fees for these contracts often ran into the $200 range or higher, and carriers made it very difficult to switch service providers. Consumers often had to deal with confusing fees and upgrade requirements.

But recently, that entire business model has been changing, and it’s all thanks to the power of competition.

T-Mobile, the nation’s 3rd-largest mobile provider, deserves much of the credit. After its acquisition by AT&T was blocked by the Department of Justice, T-Mobile decided to take on a different competitive strategy – completely reinventing the business model of cellphone carriers. In 2013, T-Mobile ditched the two-year contract model and instead offered a variety of new financing options.

Even though the company’s network was not as strong as its rivals, T-Mobile began quickly stealing cost-conscious customers, and the other major wireless companies had no choice but to follow suit. The strategy has been wildly successful, as T-Mobile continues to gain millions of new subscribers while the other carriers struggle to grow as quickly or even lose customers.

“What you see is our business is really starting to show scale benefits,” Mike Sievert, T-Mobile’s Chief Operating Officer, told the Wall Street Journal in an interview. T-Mobile has recently been marketing itself as the “Un-Carrier.”

The cellphone market has continued to redefine itself, as carriers turn more toward installment plans that allow consumers to pay for their phones over a long period of time with the possibility to upgrade more often. The installment plans offer more flexibility than the previous two-year contracts, making it easier for consumers to switch providers or pay ahead on their phones.

Even Apple now offers a plan that allows you to pay for your new iPhone in monthly payments, with the opportunity to upgrade every year. This also allows seamless switching between wireless providers.

“The reason why the end of contracts is so important is because it gives consumers a much clearer sense of what they’re paying—and often overpaying—for when they buy a phone and sign up for a mobile plan,” writes Kevin Fitchard, a mobile industry expert, in Fortune. Historically complicated phone service bills have been increasingly simplified in an effort to attract and retain customers.

Before all of this happened, lobbyists and consumer action groups called for legislators to protect consumers and restrict the ability of providers to charge contract termination fees. Yet the elimination of the two-year contract has been a result of the normal functioning of markets.

In fact, the government has often hindered progress in the mobile industry. It was the Library of Congress, after all, that first banned unlocking cellphones (until years later when Congress finally passed a law to override that decision). In fact, some experts argue that the government’s blocking of the AT&T/T-Mobile merger (though supposedly “forcing competition”) has made it harder for both companies to improve service quality across the country.

Competition is often a dirty word in today’s world, but it’s important to acknowledge the very real benefits that free markets bring to consumers. In the case of cellphone plans, the progress is clear – and we didn’t need to pass any laws.

Published on Opportunity Lives