Contracted vs. pre-paid wireless

Summary:Do unlocked devices spell doom for crappy carrier lock-in?

Denise Amrich

Denise Amrich

Contracted

or

Pre-paid

Christopher Dawson

Christopher Dawson

Best Argument: Pre-paid

5%
95%

Audience Favored: Pre-paid (95%)

The moderator has delivered a final verdict.

Opening Statements

Here to stay

Unlocked devices definitely open up new options, especially for those with the propensity or skill level for flirting with danger. New ways to get in trouble, avoid unwanted committment, and be different will always hold an appeal -- whether for a reason, a season or a lifetime. There's nothing wrong with that.

However, for those of us who like the enhanced productivity that comes with making a decision to commit to a carefully researched, decent quality system that is appropriate for our needs, it's nice to not have to learn how to use a new phone every five minutes when our no-name carrier does something cheesey that makes us go off in a huff.

You're going to pay one way or the other. Whether you have to scrape by with an unlocked older phone, or you have to pay full freight for an un-subsidized snazzy new one, or you jailbreak it and compromise security, or you have to spend a lot of time constantly learning how to use new gear, or you have to finance getting out of a contract...the house always wins.

Let's not forget it's not all about phones. It's about devices like tablets with 4G in them. These have to connect to the corporate networks in the companies where most of us have to work in order to pay for all the electronic gadgets we love so much.

One way that companies may reap some of the advantages of BYOD but not succumb to total chaos is to give a list of acceptable devices and carriers. This list is likely to include major phone companies which usually imply contracts. If a company has chosen to provision phones and other mobile devices, they're going to contract with a major player in the mobile space to get a package deal. That way, they can wipe the devices remotely if they get lost or stolen, and set up various safeguards to save users from themselves (and save themselves from their own users).


So, the security of reliable carrier lock-in with reputable vendors is here to stay.

Not your father’s Tracfone

Pre-paid phones aren’t just for kids, grandparents, and drug dealers anymore. Increasingly, pre-paid phones are making their way into the hands of smart, savvy consumers looking to save money and upgrade phones on their own terms

The move to prepaid is being driven by four major factors:

  • The Nexus 4
  • The increasing availability of unlocked iPhones
  • A shift among pre-paid providers to offer smartphones or SIM-only, bring your own phone plans instead of cut-rate feature phones
  • Data usage caps by major carriers are too restrictive with tablets and smartphones

At the height of the PC era when it seemed like new, faster, more amazing computers were being released every week, would gamers, early adopters, and demanding users wait two or three years between upgrades? Of course not and in the post-PC era, contracted wireless and its lack of freedom and choice is quickly becoming an expensive anachronism.

 

The Rebuttal

  • Great Debate Moderator

    Mic check...are my debaters standing by?

    First question coming promptly at 11am ET / 8am PT

    Readers: You will need to refresh this page *once* anytime after 11am ET / 8am PT to jump start this live debate...once you do, the page will auto-refresh with each of our questions and answers. 

    Posted by Andrew Nusca

    Ready here!


    Denise Amrich

    I am for Contracted

    Ready here...

    ...and with the popular vote at my back.

    Christopher Dawson

    I am for Pre-paid

  • Great Debate Moderator

    I'd like to start by looking at the merits of each option...

    Contract-based mobile devices are extremely popular in the U.S., about 75 percent of the total market. Why?

    Posted by Andrew Nusca

    Shiny subsidized devices

    Contract-based mobile has historically been the most popular because individuals have been able to get nice, new, exciting devices at subsidized price points that are far below what they’d pay if they were buying their devices at retail prices. The penalty fee for leaving the service before the contract ends generally makes up for that cost difference. However, switching in a world where carriers will pay your old contract fees in order to help you start fresh with their service isn’t all that hard.

    As for enterprise users, corporations are used to doing business by contract and naturally gravitate towards major carriers, in part so they can develop support relationships that will help them meet their objectives.
    With the advent of smartphones, prepaid phones became further stigmatized as uncool, especially since newer and better ones were released all the time that were unavailable on prepaid programs.

    But now a few better devices are available without contract commitments, it’ll be interesting to see if it gets closer to 50% on each side. Of course, people will still find it prohibitive to throw down half a grand every time they want the newest toy. So people may still buy and stick to a device for a reasonable period of time.

    Denise Amrich

    I am for Contracted

    Cost

    In the not-so-distant past, pre-paid wireless was largely the domain of cheap feature phones. They were fine for your 12-year old's first phone (or your grandfather's first, for that matter), but serious phone buyers were fairly limited in their choices. iPhones were not generally available unlocked for use with pre-paid providers and top Android phones aren't sitting on convenience store shelves next to the pre-paid minutes cards.

    The biggest reason, though, is cost. Very few people in the US were willing to fork over $600 for an unlocked phone that could be activated on a pre-paid carrier. Going though one of the big 4 carriers got you big subsidies on a new phone every two years, making even flagship models relatively affordable. Not only did the Nexus 4 dramatically change the landscape in this respect, but consumers are beginning to acknowledge the critical role smartphones play in their lives, and are increasingly willing to pay as much for their phones as they might a computer.

    Christopher Dawson

    I am for Pre-paid

  • Great Debate Moderator

    On the other hand...

    ...Outside the U.S. -- from western Europe to China -- pre-paid options are more popular. Why?

    Posted by Andrew Nusca

    Money, credit, and time

    In some countries outside the US, individuals don’t actually have access to credit. Some places are just starting to offer microloans. Some countries don’t have credit bureaus the way we do, and they don’t really have the financial infrastructure to create an environment of trust when it comes to lending enough money for very expensive portable devices.

    Another reason is that prepaid phones have historically been the most affordable phones available. For people making a very low wage, having even an inexpensive phone can be a huge cost item. Also, emerging nations haven’t had the level of corporate infrastructure for major enterprise device provisioning.


    The EU is an interesting case because although there is a common currency, there are so many carriers there. I remember reading that the iPhone was more than fashionably late to the party in Europe because of the difficulty Apple had in negotiating contracts with such a number of carriers, and complying with a wide variety of national and even regional regulations.

    Denise Amrich

    I am for Contracted

    Simply history

    It would be easy to point to rampant consumerism in the US. We want new gadgets, we want them now, and we want them at Walmart prices. This mentality isn't exactly unique to us, but it certainly rears its head. Major US carriers built out often incompatible wireless infrastructure at great expense, leaving us with a bunch of CDMA towers, a bunch of GSM-compatible towers, and a tough time just swapping out SIM cards to switch providers.

    However, the more significant reason is simply history.The rest of the world largely conformed to the GSM standard and rapid infrastructure growth, different incentive systems, and different regulations made more opportunities for consumer choice and competition. Consumers in other parts of the world generally didn't grow accustomed to subsidized phones but did become used to buying a phone and being able to move it between carriers. Keep in mind that even the ability to port your number to a new provider literally took an act of Congress, not so many years ago.

     

    Christopher Dawson

    I am for Pre-paid

  • Great Debate Moderator

    Unlocked: Why now?

    Now that we've looked at the market constraints, let's discuss the variable here: unlocked devices. Why are we now seeing an uptick in this kind of device?

    Posted by Andrew Nusca

    Market saturation

    Market saturation is responsible for the uptick in unlocked devices. There are a huge number of devices out there that still work even though their contract time is up. These used devices can be unlocked and resold. Companies like Gazelle have a great working business model in buying and reselling these phones.

    Also, manufacturers like HTC, Apple, and Samsung have saturated their primary markets and are looking to expand their growth. They have to grow from quarter to quarter, and this makes it necessary to tap into new markets, bringing new users into the fold, users that may fit better with prepaid plans.

     

    Denise Amrich

    I am for Contracted

    A few reasons:

    Prices are coming down, particularly in response to pressure from Google, making the carrier subsidies a bit less critical.

    The major carriers suck more every day. Either their coverage isn't what you need or new data caps are making the carriers far more expensive on a monthly basis.

    The recession: Even gadget-fiends are giving a nod to more frugal times when saving between $5 and $20 per month is very much an incentive to drop their carrier and switch to pre-paid.

    The "post-PC era" - Today, our phones are our primary computing devices. When that was true of desktop computers, would we (meaning power users) have tolerated a limited or compromised computing experience for the sake of a hardware discount? Especially if we couldn't install any software we chose or uninstall crapware and bloatware? The answer is no.

    Android fragmentation and update delays: Google is releasing significant upgrades to Android on a very regular basis and each iteration is a leap forward in capability, speed, and stability. Waiting for carriers and OEMs to push out updates is frustratingly slow; unlocked phones solve this problem.

     

    Christopher Dawson

    I am for Pre-paid

  • Great Debate Moderator

    Under pressure?

    What pressures are unlocked devices putting on the contract-based business model?

    Posted by Andrew Nusca

    More freedoms create competition

    The economy still isn’t super. People want to spend less, and control their expenditures better. Any pressure placed on the contract business model by unlocked devices is great for everyone, prepaid and contract based customers alike. Every time a new freedom is available, others will be pressured to offer competitive options or perish. Sooner or later, we may see the best parts of what contracts have to offer, without the worst parts. 

    Companies like Apple are being pushed to offer prepaid phones. They may or may not succumb to that pressure. The manufacturers get quite a nice annuity from the carriers and may not want to let go of those profits.

     

    Denise Amrich

    I am for Contracted

    Nearing a tipping point

    Unlocked devices are still a very small fraction of overall devices activated in the US, so the pressure, at the moment at least, is relatively small. However, the runaway success of the Nexus suggests that we're nearing a tipping point where unlocked phones are both compelling and inexpensive and consumers are willing to leave the security of a contract and guaranteed upgrades for flexibility, savings, and the best phone experience they can buy.

    Where the major carriers are starting to feel the pressure is in the plans they offer, especially in terms of monthly data. Shared data plans, for example, are being pitched as a way for families with multiple devices to save money. However, only pre-paid carriers are offering unlimited data anymore (even if that is often throttled after a certain point). For heavy data users, no amount of family sharing will save as much money as truly unlimited plans.

     

    Christopher Dawson

    I am for Pre-paid

  • Great Debate Moderator

    New business model?

    Does the contract-based business model have to change to fully embrace unlocked devices? (How?) Or is it merely another option?

    Posted by Andrew Nusca

    Another option

    Fully embracing unlocked devices is definitely another option, but I don’t think business models have to be an either/or proposition. Corporate customers are often going to prefer plans because they actually like vendor relationships (and are in a position to negotiate fair ones).

    It’s important to differentiate here between unlocked devices and jailbroken devices. Chipset compatibility is an issue from carrier to carrier, although we’re beginning to see a trend in world phones that will run across communications technologies. Jailbroken devices are dangerous and often can be easily compromised. No vendor wants to embrace that.

    Denise Amrich

    I am for Contracted

    Unlocked devices should be a very easy option for contract-based providers.

    Give customers a SIM in their network-compatible device, activate the SIM, put it on a contract, and you're done. Of course, if this were the case, consumers would have no incentive to jump into a contract where early termination fees would remove much of the flexibility offered by an unlocked phone.

    It's interesting that in the United States, the land of capitalism, telecommunications have long been fairly monopolistic. Even though the carriers compete for our initial business, once we've selected a carrier, our current dominant business models make it very hard to leave. If unlocked devices become the norm, the contract-based business model becomes a much harder sell, which is why carriers are doing everything they can to avoid embracing unlocked devices.

    Christopher Dawson

    I am for Pre-paid

  • Great Debate Moderator

    Impact on IT?

    Since this is ZDNet, let's talk about a use case near and dear to our hearts: the workplace. How does the unlocked device impact the IT organization -- technically, contractually?

    Posted by Andrew Nusca

    Chaos

    The unlocked device creates chaos in the already overburdened IT organization. If corporations are supporting BYOD devices (either because of cost considerations or employee demand), and they expand that to allow any unlocked device, they will have to support a completely indeterminate set of systems with a wide range of security issues, functions, and interfaces. Insert headache here. Users will be disgruntled because they will be frequently told, after hours of fruitless attempts to make things work, that “You can’t get there from here.”

    There will be users who insist on running their old Treo 600 on the corporate network while someone else will find some bleeding edge, weird unsupported Linux variation that they want to connect to the Exchange server. Any savings a company might have hoped for will be used up in IT hours.

    Denise Amrich

    I am for Contracted

    Extraordinary opportunities

    Under current models, depending upon the phone vendor, procurement becomes an issue, especially for any government-funded organization where strict procurement rules and approved vendor lists are the norm. As a CTO, how would I have purchased 1000 Nexus 4's from Google to deploy to my organization? On the other hand, it's downright simple to go to Verizon and order 1000 iPhones on a large corporate contract.

    Then comes the issue of managing their monthly costs. Current pre-paid models simply don't scale well to the enterprise level and one could only imagine the looks she might receive when a well-dressed CTO walks into the local 7-11 and asks for 1000 airtime cards. Obviously, this can be done online as well, but pre-paid providers (including their online management tools) are geared towards individual or family consumers.

    That said, the business opportunities for a systems integrator who can negotiate an arrangement with OEMs offering unlocked phones and a pre-paid provider are quite extraordinary. This also paves the way for increased BYOD, where employees simply receive some allowance towards the purchase of an approved unlocked phone and their monthly airtime, the management of which is then their individual responsibility.

    Christopher Dawson

    I am for Pre-paid

  • Great Debate Moderator

    How much does reputation matter in this equation?

    Many Americans continue to perceive unlocked devices as cheap -- only for those who can't afford contracts. Will the availability of top-flight devices shift that perception?

    Posted by Andrew Nusca

    Phones are fashion

    Perceptions will change over time. Phones are a fashion accessory. True, there is always a sense of exclusivity associated with certain brands. But prepaid vs. contract is not what makes the phone exciting. That’s all about the form and function of the phone.

    Whenever the really coolest phones are available without contracts, the social utility may shift to getting the best deal for the most awesome phone. But I’ll bet that contract players are going to do their best to make sure the cachet doesn’t leave the brand.

    Denise Amrich

    I am for Contracted

    Yes, and it already is

    Unlocked iPhones are highly sought-after and people pay a significant premium for them. Google can't keep the Nexus 4 (the best phone I've ever used, by the way) in stock. And even the pre-paid providers themselves (notably Virgin Mobile and Boost Mobile) are offering relatively high-end Android devices that don't look like the Tracfone your little sister got for her 12th birthday.

    This stigma still exists to some extent, but increasingly, especially among the technorati, pre-paid carriers are being seen as sources of no-hassle unlimited data on their unlocked phones.

     

    Christopher Dawson

    I am for Pre-paid

  • Great Debate Moderator

    T-Mobile was one of the first American players to push hard for pre-paid devices.

     It didn't work. Why?

    Posted by Andrew Nusca

    Disturbingly poor reception

    T-Mobile freedom was awesome. T-Mobile service was not. I actually had one until two years ago, before I got my iPhone. T-Mobile as a company has always been, to some degree, perceived as more reasonable with its customers.

    But their network has just never been as strong as the bigger players. We all had such high hopes for service improvement when they were looking like they were going to fully merge with AT&T. That seems to have melted down.

    Denise Amrich

    I am for Contracted

    It didn't work at first for several reasons:

    T-Mobile lacks the necessary coverage to reach what was then a fairly downmarket demographic (kids, grandparents, rural poor, and even urban customers who lacked the credit for contracted phones).

    T-Mobile has a great brand among professionals who live in the major cities they serve well; as little as a year ago, this demographic wouldn't have even considered pre-paid and often had corporate accounts anyway.

    Android phones were neither cheap enough nor plentiful enough in configurations compatible with pre-paid models for T-Mobile to make a case with any demographic at the time.

    I would argue that this has actually changed dramatically in the last year. T-Mobile is now consistently recognized for very aggressive and innovative pricing (e.g., $30/month for unlimited data and only 100 minutes of talk time for the frequent customer who rarely talks on their phone but uses data heavily) on their pre-paid plans. Their bring-your-own-phone plans are easy and inexpensive and they have made significant network upgrades. They're also the only US carrier to offer the Nexus 4 directly and have a wide selection of solid phones on their no-contract and pre-paid plans. Again, it's all about timing; the timing wasn't right when they began their push. It's right now.

     

    Christopher Dawson

    I am for Pre-paid

  • Great Debate Moderator

    2017?

    Whether you believe unlocked devices will change the game or not, we won't see change for quite awhile -- because most Americans are locked into two-year contracts. In terms of pre-paid or contract-based, how do you think the mobile market will look in, say, 2017?

    Posted by Andrew Nusca

    Lots more users

    By 2017 we should all have free phones in our flying cars.

    In all seriousness, most likely Android will be dominant and may have merged with Chrome. The Chrome OS and Android are both engineered by Google and are likely to become more tied in with each other over time, creating a dominance and convenience factor that will be hard to ignore. This is especially true since there are relatively few licensing fees compared to Microsoft and no lock-in compared to Apple.

    As mobile technology sweeps the globe, we’ll see more and more users. Inexpensive Android phones and other mobile devices on prepaid licenses are likely to dominate in emerging nations with large populations. Some of these countries never had great land line infrastructure to begin with, so this will have a democratizing effect.

    The Contract will still have a place. It will simply have to offer more, perhaps a shift towards helpful support and less towards that unsatisfying feeling of being locked in. There will probably always be more contracts in enterprise, and in the western world.

     

    Denise Amrich

    I am for Contracted

    Unlocked, converged devices will be the norm...

    ...with consumers and businesses simply buying access to widespread 4G networks. Sprint will be gone, subsumed by one of the bigger pre-paid providers who already resell bandwidth on Sprint's network. Verizon and AT&T will be premium and enterprise providers, having shifted their business models to accommodate unlocked phones around 2015 when the exodus to pre-paid providers began.

    T-Mobile? That's a little less certain; their rebranding is going well and they are leading pre-paid among the big 4. We'll have to wait and see there.

    Most importantly, though, when consumers and businesses want to buy phones and tablets (the latter, by the way, will replace phones for many individuals who simply use VoIP and a headset to make calls through their tablet which is their primary computing and communication device) will go to the same places where they would purchase computers, networking equipment, televisions, or any other electronics. Consumers will buy unlocked devices from big box stores and businesses will buy them from VARs or direct from OEMs, and manage them in the cloud, allocated bandwidth as appropriate to users. Gone will be the days of buying phones at the Verizon Store.

    Christopher Dawson

    I am for Pre-paid

  • Great Debate Moderator

    OK, final question:

    Are your personal mobile devices pre-paid, or on contracts? Why?

    Posted by Andrew Nusca

    Contract iPhone

    I have an iPhone 4, which I got when I was moving to our new house. I had to let go of my T-Mobile prepaid flip phone because I needed all the capabilities of a smartphone in order to be able to do my job remotely while managing multiple contractors on the go. I needed to have actual reception, which I didn’t with the T-Mobile phone. At the time, T-Mobile didn’t have anything resembling a decent smartphone.

    My contract is up in April, and I haven’t decided what to do. I think the monthly bill is a bit high. But I do get a lot of use out of the iPhone, and I really like it. I may keep this one for a while after the contract is up and see what exciting new options arrive on the mobile scene.

    Whether I go for another contract, or a prepaid phone, things are only going to get better and more interesting with the introduction of more competition.

     

    Denise Amrich

    I am for Contracted

    My personal phone is a Nexus 4,...

    ...purchased direct from Google and running on a pre-paid provider. My various tablets and notebooks are WiFi-only and I just tether them to my phone. My family is still stuck in a family share plan because 1) There's lots of us and my early termination fee to leave Verizon was high enough; ETs for the whole family would give my wife a coronary and 2) My wife pays the bills and managing pre-paid airtime for everyone on devices she (Luddite that she is) things are frivolous anyway just wasn't going to fly.

    I wanted fully stock Android, the latest updates, and reasonably priced unlimited data; none of those were going to happen if I stuck with Verizon.

    Christopher Dawson

    I am for Pre-paid

  • Great Debate Moderator

    Thank you, Denise and Chris, for a spirited debate

    And thank you, readers, for your comments and votes. Please check back here tomorrow for our debaters' closing arguments, and again Thursday for my final verdict.

    Neverbe late for a live debate -- sign up for our Great Debate newsletter.

    Posted by Andrew Nusca

    Always a pleasure!


    Denise Amrich

    I am for Contracted

    Thanks, all

    Going to work now on my closing argument...

    Christopher Dawson

    I am for Pre-paid

Closing Statements

You'll be giving lots more free tech support

Denise Amrich

Chris makes some great points, and definitely has the popular vote behind him.

But I think that one important thing to remember is that the ZDNet audience is comprised of some of the most tech savvy folks on the planet. You may love the freedom of unlocked phones, and almost intuitively understand how they work, or have the technical ability to come up to speed without much hassle.

But the beloved folks in your lives who are more like the "Luddites" Chris mentioned in his answer to the last question are going to be putting more of a tech support load on you when they stop going to the AT&T Store or the Apple Store to see the Genius because they like the idea of paying less for their phone service.

Freedom isn't free. Someone is going to pay for the trend towards prepaid, no-contract unlocked phones, and it's going to be you. One way or another. Probably with the unpaid time and frustration of getting lots of phones up and running for people who don't really want to hear about how they work, or learn how to responsibly handle problems that arise by themselves.

I checked out the snazzy Nexus 4 that Chris Dawson mentioned. After all, I like my Nexus 7 well enough. Although there is plenty of information about how to buy dumb apps from the Google Play store, the only information I can readily locate on the website about finding a provider is the ominous sentence, "Purchase Nexus 4 directly from Google Play, with no carrier commitment or contract."

So our friends and families will have a $300 brick and a huge homework assignment of how to find a carrier, read the fine print on whatever non-contract paperwork they're required to sign, be freaked out by the decision making process, and lean on us. And when things go wrong, as they so often do, it'll somehow become your fault for giving bad advice, and your job to fix it. It's a good thing you all love no-contract devices so much, because you'll be configuring (and re-configuring) a whole lot of them.

Welcome to the wonderful world of contract-free mobile. How much will you already-overburdened techies be able to charge for the tech support that used to be included with the contracts your friends and families once had? I'm guessing nada. Have fun!

Long-term wireless contracts stink

Christopher Dawson

You can say all you want about representative samples and selection bias, but as of Tuesday afternoon, 93% of the votes in our Debate favor the long-term success of pre-paid vs. contracted wireless service. Why? Because long-term wireless contracts stink. They represent indentured servitude to unresponsive, monopolistic wireless providers for the price of a discounted phone. These same providers then charge more per month for capped data than pre-paid companies charge for unlimited. Nobody cares about voice anymore but the big 4 providers are happy to charge a pretty penny for that, too.

No thank you.

Yes, there will be challenges, especially in bringing this model to the enterprise, but long-term, the ability to better manage end user bandwidth needs, optimize the user experience, and obtain the best hardware to meet users’ requirements, all while saving money, will kill the dreaded contract and make pre-paid wireless the method of choice for both consumer and enterprise wireless.

 

 

Most people know where they stand

Andrew Nusca

Denise did her best to argue the more difficult position, but in the end, it became clear that even she could support the pre-paid cause. For that, I must give Chris -- and the popular vote -- the nod.
 
But there's a big asterisk on the pre-paid market, and that's the IT organization. "Procurement becomes an issue," Mr. Dawson said during the rebuttal stage. That's a big blocker here: the traditional one-stop-shop mentality that IT harbors is at risk here, even though most consumers focus on the impact of contracts on their wallets.
 
Nonetheless, most people know where they stand. As BYOD takes over the enterprise, those people might find themselves on the same side as IT for once. And wouldn't that be nice?

Topics: Great Debate

About

Andrew Nusca is a former writer-editor for ZDNet and contributor to CNET. He is also the former editor of SmartPlanet, ZDNet's sister site about innovation. He writes about business, technology and design now but used to cover finance, fashion and culture. He was an intern at Money, Men's Vogue, Popular Mechanics and the New York Daily Ne... Full Bio

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