My mom is ready for a new iPhone. She almost went out and got the current generation, the iPhone 6, but I convinced her to wait until September 9th when Apple will refresh the line up. So she's waiting.
At the same time wireless phone carriers are going through their own set of changes, which raised some questions around what type of plan she should get.
A Quick Economic Lesson
The wireless industry is an "oligopoly" which means there are only a few dominant companies in the market. Usually this happens because the cost of another company entering the market is really high. In this industry, a new company would have to build out a new wireless network. That's probably not going to happen because of how expensive it is, and so the existing companies are safe from someone outside coming in and stealing their customers and profits. As a result, their incentive to have the best products/services at the lowest prices is pretty low.
(BTW, if there is only one company, that's a "monopoly." An example is your water/sewer provider. The cost of digging multiple holes to lay multiple lines of pipe is huge and so one company offers water to the whole area. The solution to protecting customers with these types of monopolies is to regulate them (or just let the government run it) and require a certain level of service and/or price.).
Back to phone carriers. Another general characteristic of oligopolies is that companies tend to make changes together. When you see one company changes, you can bet that the rest will follow because customers will quickly start switching. Since it's so expensive to change prices and/or services, it usually doesn't happen that much (new marketing, new training, new backend systems, etc are all expenses they'll have to take on). However, sometimes customers get lucky and one of the smaller players gets tired of being small and decides to go rogue. That's what happened to T-Mobile.
T-Mobile Changes The Nature of Wireless Phone Plans
T-Mobile radically changed their plans and explicitly attacked the bigger players. As a result, we've seen two dramatic reactions in carrier plans that are increasing transparency and plan flexibility. The first big change happened a little while ago: Texting and talking are now unlimited. Now you pay for a different levels of data and share it with everyone on your plan.
More recently, phone subsidies are switching to payment plans. You used to pay a smallish up front fee, sign a two-year contract and the rest of the cost of the phone was built into the wireless plan. Now it's more transparent. The wireless plan rates went down and now you take the full cost of the phone and split it up into monthly payments just like you would with a car or house. So when you pay off your phone, the payment goes away. So far, no carrier charges interest on these payment plans which is nice.
The AT&T Next Program
So, my mom is looking to get a new iPhone and we're on AT&T. Given all the changes, we wanted to know if she should switch over to
AT&T's Next program (which is the payment plan instead of the subsidy). The short answer is yes. AT&T is so keen to move everyone over that it's significantly cheaper than the subsidy plan. I sat down with a sales rep and did the math for each scenario. First, you don't have to make down payment if you don't want to and save $200. Then the Next service plans drop $25-$15 each month compared to the subsidies. So it's worth switching.
The next question: which payment plan should you choose? AT&T has 4 options which they named based on when you can upgrade, NOT based on how many payments you'll make. Way to make it confusing AT&T. Here they are:
- AT&T Next 24: 30 payments; trade in and upgrade after 24 months.
- AT&T Next 18: 24 payments; trade in and upgrade after 18 months.
- AT&T Next 12: 20 payments; trade in and upgrade after 12 months.
- AT&T Next with down payment: 30% down, then 28 payments; trade in and upgrade after 12 months.
So, the equivalent of the two-year subsidy is AT&T Next 18. With Next 18, you make 24 payments. Once those are finished, you can do whatever you want with the phone, just like with a subsidy. The big difference is that after that last payment, you're costs will go down.
Now clearly AT&T doesn't expect you to actually pay off your phone. That's why the plans are named based on the upgrade cycle. Sticking with our Next 18 example. If you get a year and a half in, and want to upgrade. You can! You give your phone back to AT&T and they'll start you on a new payment plan. If the phones are priced exactly the same, your monthly costs won't change at all (except for some inevitable taxes you'll pay). AT&T will then take the phone you gave them and sell it to someone else to recoup the rest of their money. That seems fair.
If you wait the full 24 months before switching up phones, you could sell it yourself since you'll no longer be tied to the payment plan.
If you didn't get that, go back and review each plan type and the example. It's worth understanding.
By the way, AT&T is fine with you paying off early too. So if you planed to trade it, but a company like
Gazelle is making a great offer on your phone. You could pay off your phone early and sell it. Then when you buy a new phone you'll get back on a payment plan. It's extremely flexible and much more transparent.
Speaking of Gazelle...
With September 9 coming quickly, it got an email from Gazelle telling me I can lock in the price of reselling my phone today in advance of new iPhones being announced (and subsequently dropping the value of my existing phone). I'm on the old two-year contract, so I'm not selling, but it didn't stop me from doing some math.
I have an iPhone 6 Plus with 64GB of storage in good condition. Unlocked, it costs $850.
Gazelle is offering me $336.
If I outright paid for my phone, that means my total cost would be $514 (850 - 336).
If I did Next 12 (20 payments, upgrade after 12 months) here how it would look:
$850 / 20 payments = $42.50 per month. Since it's been a year, I'll have made 12 payments, my total cost would have been:
$42.50 x 12 = $510
Well. Well. Well. Would you look at that. Clearly AT&T did their homework (or Gazelle? Not sure). I don't know how this holds up to other devices, but for iPhone, it doesn't seem to matter which route you take.
For completness, the other option is "AT&T Next with down payment"
30% down x $850 = $255
Plus 28 payments on the remaining balance of $595: 592 / 28 = $21.25 each month. After 12 months, when I could upgrade, my total cost would have been:
$21.25 x 12 = $255 + the down payment of $255 = $510
Ah. I love it when numbers work out like that.
What if you wait a month? Or Apple delays a month?
Now it gets interesting. Here's how much more it will be each month:
- Gazelle: I'm not sure, but it's probably between $20 and $45. Apple had lots of delays last year and Gazelle extended the turn-in period to accommodate people. So depending on the reason, it could be zero.
- Next 12: $42.50 (only 8 more payments until fully paid off)
- Next Down: $21.25 (16 more payments)
Great. What Should I Do?
OK. Mom. I hear you. That's nice information and background, but what option should you choose?
First of all, let's be clear. We're talking about optimizing an expensive purchase. If you want to actually save a significant amount of money, go with
Republic Wireless. Their plans are amazingly priced. The only catch is that they only offer 2 phones: The Moto E and Moto X. I actually think the Moto X is a good phone. If I was an Android user, this is exactly what I would get.
But I'm addicted to Apple. And so instead we're talking about optimization and saving less than $50 instead of hundreds with Republic Wireless.
If saved up the full price, should you pay for it all up front? There are some nice benefits: It gives you instant flexibility to switch carriers and gives you flexibility on when to upgrade. Waiting an extra month or two will only cost you on the resale side. If you have the money. Go for it.
As for the Next Program: Do you want to upgrade every year? Or can you wait two years? If you plan to wait two years, go with Next 24. Then actually upgrade on schedule. Don't wait around.
If you want to upgrade every year, the down payment option strikes a nice balance. If you need to wait a month or two, the addition cost isn't too bad. If you follow the schedule, it doesn't cost extra.
Fundamentally, follow whatever plan you choose. If you choose, Next 24, upgrade in 24 months. If you choose Next 12/Down payment, upgrade after 12 months.
If, for some reason you can't upgrade when planned, but still plan to upgrade before you finish making payments, then you'll want to pay off your phone on the upgrade month. Then sell it like normal on eBay or Gazelle. That'll save you a little extra money.
Next 18 doesn't make much sense if you're an iPhone user. Apple releases new phones at the same time once a year, so you're not going to upgrade after 18 months. If you're on Next 24... and get to month 24, but you don't want to upgrade but do want your phone paid off, just pay it off and it's as if it was the Next 18.
Final Thoughts
AT&T's Next program is actually a good alternative to the subsides (except for those of you still on the unlimited option). It's worth switching. Then decide when you want to upgrade and choose the plan that goes with it. If you have the cash saved up, consider paying for it up front. This obviously isn't the most frugal option (that would be picking a cheap plan and phone and using it until it breaks), but it does optimize your dollar while giving you the latest products from Apple.
Hopefully that was helpful. Feel free to ask questions below or talk to an AT&T rep.
