Earlier this year my wife and I found ourselves in a bit of a predicament. She damaged her phone to the point that it no longer booted, but we didn't have insurance on the phone and had several months left on our contract with Verizon, meaning we had no available upgrades. Since she had become accustomed to having a smartphone - a big help in her daily work routine - we knew we were looking at a potentially expensive replacement. Ultimately, we came up with three scenarios:

  1. Buy a replacement phone at retail price, which looked like it was going to cost somewhere in the $600 range (she was using a Droid 4 at the time)
  2. Get a cheaper phone second hand, possibly not in the greatest condition but likely useable.
  3. Break the contract, eat the ETF, and get a subsidized phone on a different carrier.

I spent some time looking at the cost, and #2 at first seemed reasonably attractive. There were a couple of problems with getting a used phone, though, that ultimately ruled that out. First, my wife would be phoneless until the new one arrived, which wasn't really desirable. Second, there wasn't a huge second-hand market for the Droid 4, so it didn't look like we'd really end up saving all that much over a new one (or, at least, not enough to make it worth the wait).

So, the most cost effective option actually ended up being #3 - pay the ETF to Verizon (about $200), and get a new contract elsewhere. Sprint had a rough equivalent to the Droid 4 on their network, branded as the Motorola Photon Q, so we switched her over and got the phone for $100 up-front. Overall it cost $300, which was still much cheaper than a new one, so even though we had to pay an ETF we still managed to not break the bank.

Striking out on my own

I had no real interest in switching to Sprint with my wife. Partly this was because the thing I use my phone for most is data, and Sprint's network is painfully slow unless you're in one of their new LTE cities (and their LTE footprint is fairly small, still). Verizon had LTE pretty much everywhere it seemed, and the idea of going back to Sprint's 3G network was incredibly unappealing.

On the other hand, I knew I couldn't stay with Verizon. Being on a plan by myself was going to cost upwards of $90, with my wife's Sprint plan running us another $80, and that was way more than I was willing to pay for cell service. Since I had an interest in the Nexus line of phones anyway (I had a Galaxy Nexus at the time), and the Nexus 4 was a comparative steal, I decided to look into non-contract options.

T-Mobile had a very attractive plan that I had read about on various Android forums. It offered 100 minutes, unlimited texting, and 5 GB of high speed data (throttled after the limit). Since I rarely use minutes but I use data on a daily basis, I decided to buy a SIM and give T-Mobile's service a try. I sold my phone and bought a Nexus 4 to replace it, activated the SIM, and I was off.

The cost of the plan? $30 per month.

Serious cost savings

When I mentioned to friends and family that I was paying $30/month for my phone bill - including taxes and fees! - I got some pretty incredulous responses. That's a third of what I pay. How is that possible? Doesn't T-Mobile's coverage stink?

To some degree, yes, T-Mobile's coverage has problems. I spend most of my time in or around the cities and their nearby suburbs, where I found that T-Mobile had widespread LTE coverage. 95% of my time was spent with high quality service, and on top of that, T-Mobile's LTE network absolutely screamed. It was fantastic. On the flip side, if I ventured too far from the cities I found myself on EDGE, though still with very good voice/SMS service. On the whole, it was hard to complain for $30 a month.

But really, everyone was interested in how it could possibly be so cheap, and it made me realize that the average consumer doesn't really understand what their bill is paying for. Why is contract service so much more expensive than prepaid, even through the same network provider? Why would anyone sign a contract in the first place?

Americans, probably more so than people of other countries, have come to consider cellular contracts to be commonplace. You sign a 2 year agreement, and in return the carrier subsidizes the cost of your phone. Generally you end up saving something on the order of $400 for a high-end smartphone. The carrier isn't doing this out of the goodness of their heart, of course; the cost of that subsidy is built in to your contract's pricing, which they've locked you into for 2 years. If you complete your contractual obligation, they recoup their costs.

Here's some math to make this more concrete. Let's say you want to get an iPhone 5S on AT&T with a 2 GB data plan - not a terribly large amount of data, but enough to get some good use out of that new smartphone. If you head online, as of this writing, you can get the 16 GB iPhone 5S for $99 with a 2-year contract. The full retail price is $650, so you're saving $550 right off the bat. However, the 2 GB plan will run you $95 per month, so over the life of the contract you'll end up paying 99 + (95 * 24) = $2379.

AT&T's prepaid brand, GoPhone, offers that same 2 GB plan for $60 per month, but your phone won't be subsidized. So although you pay that potentially unpalatable $650 out of your pocket, over 2 years of service you only pay $1440. That comes out to a net total of $2090, a savings of $289 dollars. Although that still doesn't cover the cost of the $550 subsidy, it helps to cover over half the cost, and it keeps you on their service (and in their books) for a full 2 years. Without that subsidy, monthly prices come down, and you save cash.

Freedom to move

The other big benefit to prepaid carriers, aside from the monthly savings, are that you aren't beholden to any kind of contract. Early termination fees are pricey, but they can sometimes be problematic if you end up moving unexpectedly or become unhappy with your carrier. What they're banking on is that you won't be willing to eat that ETF in order to leave, and if you do then at least they cover the subsidy they offered you at the beginning of the contract.

Prepaid carriers have no obligation, so you can leave whenever you want. Since the FCC has mandated number portability for a while now, you don't even have to get a new phone number when you leave. As a practical example of how this can be a benefit, consider Aio Wireless.

Aio launched nationwide in September, as a prepaid subsidiary of AT&T. They offer 3 plans at the moment, which cost $40, $55, and $70 per month (taxes and fees included). To entice people to switch, Aio made the following offer: bring your own phone and stay with us for 2 months, and we'll give you the third month of service for free. Since I was on a prepaid T-Mobile plan, I switched solely to take advantage of the promo, and got 3 months of service on AT&T's larger network for a total of $40 per month. It's more expensive than the $30 T-Mobile plan, but coverage is better and I have unlimited minutes if I need them.

Plus, once the 3 months are over, I can switch to another plan with no ETFs to worry about. There are dozens of players in the Mobile Virtual Network Operator (MVNO) market, and with a prepaid plan you're free to play the field. Not happy with your carrier's customer service? You have the power to walk away. Speak with your wallet. Someone running a sweet promotional deal? Head on over and get in on the action. If you're really savvy, you can even get prepaid refill cards online at discounted rates, bringing your net monthly costs down even further.

I've done the contracted plans, and often found myself longing to switch for various reasons. Someone else always seemed to be rolling out a new super-fast network or getting some marquee phone that I wanted. Now that I've enjoyed the benefits of prepaid service with an unlocked phone, I can't imagine going back to a contract. The costs are lower, the options are wider, and I feel like I finally own my service. Now that I've gone prepaid, I'm never looking back.