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T-Mobile’s no-contract plan attempts to shake up the wireless market

There are two ways to look at yesterday’s announcement by T-Mobile that they are scrapping the two-year phone contract and replacing it with what the company calls its Simple Choice Plan. Some could argue that it’s a long-overdue move, designed to shake up the U.S. wireless industry and make devices more affordable. However, others could claim that it’s a desperate move by the smallest of the four major carriers; a move that could lead to a further decline in market share, as consumers take advantage of their no-contract status to switch to glitzier phones and faster networks.

Whichever way you view T-Mobile’s announcement, it’s unlikely to have the impact of Verizon’s groundbreaking Share Everything plan, which was introduced last June and which was quickly matched by AT&T with a share plan of its own. No-contract plans are already offered by Boost Mobile and MetroPCS (and by the major carriers through their pre-paid plans), and anyone who wanted to escape the limitations of two-year deal has had ample opportunity to do so.

What T-Mobile’s plans might do is switch the conversation back to the overall cost of a smartphone and the increasingly problematical issue of smartphone redundancy.

It’s no secret that we pay a lot of money for the pleasure of using our smartphones on one of the top three carrier networks. In exchange for all those payments over the life of the contract, the carrier sharply discounts the upfront cost of the device. Here’s an example: buy a 16GB iPhone 5 with a two-year contract from Verizon, AT&T or Sprint and that phone will cost you $199, plus tax. Buy that same phone unlocked and contract-free and it will cost you $649.

Naturally, most people opt for the upfront savings but this where T-Mobile CEO John Legere says we are getting ripped-off. He claims the carriers more than make up for that upfront discount by loading up on monthly access fees, data plans and other charges. To convince consumers that the T-Mobile plan is better value, he needs us to focus on the long-term benefits rather than the short-term savings.

Despite the logic of the cost-savings argument – and the overwhelming popularity of no-contract plans in Europe and Asia – the major carriers have had no trouble sticking to their traditional two-year model. Perhaps it’s the buy-now-pay-later mentality of the U.S. consumer, or maybe it’s the security of knowing that once you buy a phone you don’t have to go through the experience for another 24 months! (T-Mobile has needlessly muddied its argument against two-year deals by allowing consumers to pay off the upfront cost of a phone over a maximum period of, you guessed it, two years!)

If T-Mobile breaks through with its Simple Choice Plan, it might be because of the issue of smartphone redundancy rather than cost. At the moment, there is a clear disconnect between the average smartphone manufacturing cycle and the major carrier plans. This results in, say, an iPhone owner suffering through a year or more of using an outdated model, while he waits for his contract to run out.

Any Samsung Galaxy S III owners who purchased their device within the last 12 months will soon be facing the same situation with the release of the Galaxy 4. While the higher profiles phones tend to get the majority of the press, smartphone redundancy is often even worse for less popular phones, with consumers putting up with outdated phones for 18 months or more of their existing contracts.

T-Mobile’s plan hopes to change all that, freeing up consumers to buy phones whenever they want, without having to pay early-termination fees or other penalties. In exchange, T-Mobile gets a fairer price for each phone but can continue to discount certain models based on supply and demand.

As we suggested earlier, T-Mobile’s plan is unlikely to revolutionize the U.S. carrier market but, at this point in time, anything that prompts a discussion about the way phones are bought and sold has to be good for the public interest.

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