AT&T, T-Mobile, and Verizon Wireless have each introduced new "early upgrade" programs that allow wireless customers to trade in their smartphones as often as every six months. Are these plans really worth the cost? And which one offers the most value?
I try to answer these questions in this Ask Maggie.
As T-Mobile CEO John Legere said when he introduced his company's new Jump program, "Two years is too long to be locked into a phone. You should decide when you upgrade, not your wireless company."
Wireless consumers hungry for the latest and greatest phones share this sentiment. But even with the slick new plans, frequent upgrades will still cost wireless subscribers a pretty penny. In this edition of Ask Maggie, I break down the true costs of these plans and show how much you will really spend if you subscribe to each of these plans over a two-year period.
I also explain which carrier offers the best value when it comes to a frequent upgrade plan. But I also show how costly it is to participate in these programs as compared to simply waiting two years to buy a new device.
AT&T Next vs. T-Mobile Jump vs. Verizon Edge
I'm pretty sure you've been slammed with e-mails asking you to compare which early upgrade program offers the best value for consumers. I'm a Verizon Wireless customer that's thinking about switching to T-Mobile. (Coverage isn't an issue for me, since I live in Washington, D.C., and rarely get out of town much.) What I wanted to know is which of the upgrade plans gives the best value. The math that everyone's been showing is a little fuzzy for me and you've always been able to dumb everything down for me so I'm hoping you can use your magic and explain all this for me.
The first thing you need to understand when looking at any of these carrier device upgrade plans is that like a casino, the "house" always wins.
What do I mean by that? None of the carriers that has recently introduced an early upgrade program is actually giving its customers a "special" deal to upgrade to a new device more frequently. You have to remember that smartphones are expensive pieces of equipment. And under the traditional phone subsidy models, the more often people upgrade their devices, the more expensive it is for the operator.
This is why AT&T and Verizon have each extended the timing of when customers can upgrade their devices when they are on a service contract to a full 24 months. It's also why many of these carriers also charge device upgrade fees. And it's why T-Mobile has moved away from device subsidies altogether. Under its no-contract Simple Choice plans, consumers must pay full price for their devices.
So don't be fooled. None of these new plans is really a great deal for consumers.
Lease vs. buy
That said, there are some people who feel they must have the latest and greatest phone at all times. But the problem these consumers have is that they still want to be able to buy a high-end smartphone for $200 and six months later or even a year later, be able to buy another equally innovative device for $200.
Unfortunately, no carrier will allow you to do this on a regular basis because it's simply too expensive for them to maintain. The reason why is that the device you think costs $200 actually costs $700. Under the traditional two-year service contract, carriers make up the $500 difference by bundling the cost into your monthly service fee.
So the more frequently you upgrade your device at the $200 price point, the more money a carrier loses because the company hasn't been able to recoup the cost of that device in the shortened time frame.
More from Ask Maggie
And as we all know, wireless operators are not in business to lose money. That said, some customers still want a new phone every six months or a year. So AT&T, T-Mobile, and Verizon have devised new programs that allow people to upgrade early in exchange for trading in their older devices. To ensure that they still make money on these upgrade services, the carriers are requiring subscribers to pay a good portion of the cost of the device before they're eligible for the trade-in program. And by the way, the carriers still plan on refurbishing and reselling those devices that are traded in, which means if your device isn't in good working condition, it doesn't qualify for a replacement.
The benefit of the early upgrade programs for consumers is that it helps mask the sticker shock of high-end smartphones by allowing subscribers to make smaller monthly payments on devices rather than a hefty one-time payment on their device. And instead of forcing customers to pay off the full cost of the device before buying another one, these plans allow customers to trade-in devices that are still in good working condition in exchange for erasing the remaining balance that's left to pay the full price of the device.
It's similar to how car dealerships offer leasing agreements for new cars; you pay a monthly fee to use the car, and then you're able to upgrade to a newer car at the end of the lease term and start the whole process over again. If you continue to lease in this way, you never actually pay off the full cost of any particular vehicle. And you are constantly making a car payment.
The same is true of these trade-in programs. If you continue to trade in devices and upgrade to newer ones, you never actually pay off the device. But what ends up happening is that over time you spend far more money in monthly payments than you would if you just went with the traditional model.
In fact, when you crunch the numbers on all three of these programs, it's easy to see that you'd be financially better off to keep your smartphone at least two years before upgrading. I'll explain why later.
Before I get to that, let's compare the ins and outs of each of the programs.
AT&T Next: This early upgrade service allows customers to upgrade to a new device once every 12 months. There are no specific fees associated with the service, but subscribers are required to make monthly device payments.
The amount of each payment is calculated by taking the overall retail cost of the device and dividing by 20 payments. These fees are paid on top of monthly wireless service charges. There is also no down payment fee for the device. (Remember that with a subsidized phone, you pay the subsidized cost and you make no other device payments for the life of your two-year contract. You only pay the standard service fee.)
Once you hit the 12-month mark, you are eligible for an upgrade. At that point, you trade in your device, and you can choose another phone. The process is then started over again. If you leave AT&T before the 20 payments have been made, you must pay off the rest of the phone before ending service.
T-Mobile Jump: This early upgrade program is only available for customers financing their phones through T-Mobile. It's not available for customers who have bought their device at full price and are not making monthly finance payments.
Under T-Mobile's service plans, customers are required to pay a down payment on the device and also make 24 monthly payments to pay off the balance. Then subscribers pay a monthly service fee for voice, text messaging, and data usage. Jump subscribers are also required to pay an additional $10 a month to get the opportunity to trade in their phones before they are paid off.
After being in the Jump program for six months, subscribers are eligible for their first trade-in. At this time, the process restarts again. Customers pay another down payment on a new device and resume monthly device payments.
Subscribers are permitted to upgrade their phones twice in a 12-month period. The Jump program also works as an insurance policy, which means the $10 fee paid for Jump also covers the device for damage, loss, or theft. Of course, if the device is damaged, lost, or stolen, customers must still pay a deductible in addition to a down payment for a new device.
Verizon Edge: This early upgrade program is similar to AT&T's upgrade program in that it doesn't require a device down payment, but it requires monthly device payments. These payments are broken up over 24 months, as opposed to AT&T's plan, which breaks the cost into 20 payments.
Another difference is that Verizon allows subscribers to upgrade every six months. The only catch is that when a customer trades in his phone, the device must be 50 percent paid off. This means that if you want to upgrade after six months, you've already likely paid off a quarter of the device, so you will have to pay an additional quarter before you are allowed to upgrade. After you have traded in your old device, which must be in good working condition, you can begin the process again with a new phone.
Which carrier trade-in program offers the best deal?
No matter which way you slice and dice the numbers, T-Mobile offers you the best deal when you factor in overall cost of ownership, regardless of whether you participate in a trade-in program. The one thing you must realize is that the most expensive part of owning a smartphone is not the cost of the device, but the cost of the service itself.
It's sometimes difficult to see this since the upfront cost of a device at full price or even with a subsidy looks like it's so much more than the monthly cost of the service. But you have to remember that the phone doesn't work without service, and those service charges are broken into smaller monthly chunks disguising the true cost of ownership when you use a smartphone. But make no mistake about it, at the end of a two-year period, you are spending far more in service fees than you are for the device.
To help illustrate the true cost of owning a smartphone and to calculate which wireless, upgrade, and device plans offer the best value, I have compared similar plans so that you can see a side-by-side apples-to-apples picture.
For the purpose of this article, I compare the cost of a brand new 16GB iPhone 5 from all three wireless carriers: AT&T, T-Mobile, and Verizon Wireless. On all three carriers, the cost of this device unsubsidized is $650. The subsidized cost from AT&T and Verizon is $200. The remaining cost of the device is bundled into the cost of your monthly service, which you are required to pay over two years.
T-Mobile charges a $146 down payment for the 16GB iPhone 5, and it requires 24 payments of $21 per month to pay off the remaining cost of the device. This fee is on top of the service plan fee you will pay to have phone service. But unlike AT&T and Verizon, once the $650 on this device is paid off, you will no longer have to pay the $21 extra fee each month.
In an effort to paint a full picture of total cost of ownership, I have also included the cost of the latest smartphone service plans offered by these carriers in my analysis. And for AT&T and Verizon Wireless I use the $110 a month share everything plans, which gives consumers unlimited voice calling and text messaging and up to 4GB of data per month. Since T-Mobile doesn't have a specific 4GB data plan, I use its $70 unlimited Simple Choice plan, which offers unlimited talk, text messaging, and data service.
|6-month upgrades||12-month upgrades||24-month upgrades||24-month upgrades outside of a program|
|AT&T||NA||$1710 x 2 = $3420||$3290||$2840|
|T-Mobile||$752 x 4 = $3008||$1358 x 2 = $2716||$2570||$2330|
|Verizon Wireless||$985 x 4 = $3940||$1645 x 2 = $3290||$3290||$2840|
The true cost of device upgrade
In this table I calculated what it would cost if you participated in the various trade-in programs and you traded in your smartphone every six months, every 12 months, and every 24 months. In addition to listing the individual cost for a specific period of time, I also extrapolated how much it would cost you if you continued to upgrade to a similar device in these intervals for two years. In the last two columns, I show how much it would cost you over 24 months if you didn't trade in your device at all. And you can see a comparison between the total cost of ownership when you participate in the trade-in program and when you don't.
For example, on T-Mobile's Jump program if you upgraded at six months, the total cost of ownership would be $752 for six months. This includes the device's down payment, which is $146 for the iPhone 5; six months' worth of device payments, which is $126; six months of Jump charges, which is $60; and six months of the unlimited Simple Choice service, which is $420.
If you continued this trend and traded in a similar device every six months, it would cost you $3,008 over two years. By contrast, if you only traded in your device once a year, you'd save $146. And if you didn't participate in the program at all and instead traded in your device every two years after the device was paid for, you'd save even more money.
Using Verizon's plan to trade in devices every six months is the most expensive, because you must pay for at least 50 percent of the cost of the device before you can trade it in. This means that you must pay $325 plus $660 for six months of the $110 wireless service for a total of $985. If you did this every six months for two years, you'd pay a total of $3,940.
Another thing to note is that because AT&T breaks up the device payments over 20 months instead of 24 months, when you are eligible to trade in your device at 12 months, you've already paid for more than half the cost of the device. In the case of the iPhone 5, you've already paid $390 for the device at the 12-month mark.
A straight-up comparison among the three carriers using these early upgrade/trade-in programs shows that no matter when you decide to upgrade, T-Mobile offers the best deal.
It's not only a better deal for you when you trade in a device in six months, but T-Mobile's value still holds if you trade in your device at 12 months. In fact, you'd spend $352 less if you were a T-Mobile customer trading in your device as compared with being an AT&T subscriber on its Next plan. And T-Mobile's program is $287 less expensive than what Verizon subscribers would pay to trade in their devices after one year on its Edge program.
The trend continues to hold true if you decide to upgrade after two years. In that instance, if you were on either the AT&T Next or the Verizon Edge program, you'd spend $720 less over two years than you would if you used T-Mobile's Jump program.
Of course, as you can see from the comparison charts I've put together, you get the best value by not participating in any of these trade-in programs and waiting two years between devices.
In the case of T-Mobile, the longer you hold onto your device, the more value you get out of the overall plan. Not only do you save on device down payments, but you forgo the extra $10-a-month Jump program fee, and once the device is paid in full, you also don't pay a device fee.
When it comes to AT&T and Verizon Wireless, if you don't participate in the trade-in program, you don't have to pay full price for your device. This alone will save you a minimum of $450 over the course of two years.
And if you don't participate in a trade-in program, you can still sell the device yourself once your contract ends, which could net you at least another few hundred dollars on top of your existing savings. I checked the trade-in site Gazelle this week, and it is offering $300 for the 16GB iPhone 5 in "good" condition. You could get even more if the device is in pristine condition or if you try to sell it elsewhere.
But if you are inclined to want a new device every six months or even every year, T-Mobile still offers you the better deal over its competitors. In fact, your total cost of ownership using T-Mobile's Jump program is still $124 less than what it would cost you over a two-year period if you signed up for a traditional two-year plan with either AT&T or Verizon Wireless and upgraded your device at the end of that contract.
How is T-Mobile a better value with all those extra fees?
T-Mobile's value may seem counter-intuitive given that the carrier's Jump program requires you make a device down payment and tacks on an additional $10 a month fee to participate in the program. The reason why T-Mobile's service is a better deal is because as I explained above, the monthly service cost is so much less than either AT&T's or Verizon's service. And remember, the service is what really adds up over time, not the cost of the device.
What's more, as T-Mobile's CEO pointed out recently, with the AT&T and Verizon plans, you're essentially paying for your phone twice. Remember that the cost of your monthly service on AT&T or Verizon is the same whether you sign a two-year contract and take a device subsidy or you forgo the subsidy and pay for the phone outright.
AT&T and Verizon have already bundled the cost of the phone into the monthly service fee. So when you buy your phone outright or sign up for a financing plan that allows you to trade in your phone, you're paying an additional charge for the phone on top of the service fee, which includes charges to cover the cost of the device.
|One-year cost with trade-in program||One-year cost selling the device yourself|
Trade-ins vs. selling the device yourself
The new programs introduced by AT&T, T-Mobile, and Verizon Wireless aren't early upgrade programs so much as they are trade-in programs. The truth is that you can upgrade your device at any time regardless of whether you are on a contract. The problem is that if you do this before your operator offers a device subsidy, you have to pay for the total cost of your new device.
Many people who don't want to wait that long, have already figured out that you can resell your smartphones on trade-in Web sites or directly to new buyers. And then using those proceeds, you can put that toward the cost of a new device at full price.
The question I answer in this second table is whether it's more cost effective to participate in the carrier trade-in program or whether you should just resell your device on your own.
For this analysis, I assumed that you could get $300 for a 16GB iPhone 5 in good condition from the trade-in site Gazelle.
It's clear from the table that if you're a T-Mobile customer, it's more cost effective to buy your device at full price upfront than to finance it and participate in the Jump trade-in program. At a minimum it looks like you'd save $168 on an iPhone 5 if you sold it after one year as compared to participating in the Jump program for a year and trading it in for a similarly priced device.
When it comes to either the AT&T or the Verizon Wireless trade in programs, it's essentially a wash if you want to trade in or sell your phone after one year. In the case of AT&T, you could save $40. But in Verizon's case, you'd actually lose $25 by buying the device outright and selling it after a year.
The reason why it's basically a wash for AT&T and Verizon customers regardless of whether you participate in the trade-in program or you sell your device on your own is because you still have to pay for the device.
If you are participating in the trade-in program, you are paying an extra fee each month for the device on top of your monthly service charge, which in theory already bundles in the cost of a device. So as I explained above, you're paying twice for the same device. If you are under contract and bought your device at a subsidized price, if you sell it before you are eligible for an upgrade, you still need a device to finish out your contract.
In the table, I assume the full price of an iPhone 5 without a contract. If the device was bought with a subsidy, then I might assume the cost is $200 more than what is listed in the table, since you would still have to buy a replacement device to finish out the contract. And since you wouldn't be eligible for an early upgrade, you'd have to pay full price for a new device. Of course, you could also buy a used device or use an existing device until the contract period ends, but that defeats the whole point of having a trade-in/early upgrade program.
Some people might be tempted to try to game the system. They may try to buy a new phone for the subsidized price under a contract and then cancel that service and pay an early termination fee when they want to upgrade to a new phone. After paying the early termination fee, they may try to start a new contract, buying a new device at the subsidized price. While this may sound like an ingenious scheme, the reality is that carriers won't allow you to cancel your service, pay an early termination fee, and then restart a new contract service so that you can get another subsidized phone.
That said, some people have figured out how to swap upgrades with relatives and friends on family plans. These schemes can work, but just figuring out whose upgrade is available when and swapping phone numbers among family plan members gives me a headache.
The bottom line
Whether you plan on upgrading every six months, 12 months or 24 months, T-Mobile offers you better value when compared to AT&T or Verizon. But the best value for anyone is to hold onto your smartphone at least two years and then sell your phone via a third party site or directly to an individual.
Just remember, these trade-in/early upgrade plans are not designed to save you money. The only way to do that is to hold onto the device you have. In fact, carriers have designed these new programs to generate more revenue by allowing you to trade-in a phone, which they will refurbish and resell to someone else, while giving you the opportunity to buy another new device at full price. No matter how you look at it, the "House" always wins.
I hope this advice was helpful Good luck!
Ask Maggie is an advice column that answers readers' wireless and broadband questions. The column now appears twice a week on CNET offering readers a double dosage of Ask Maggie's advice. If you have a question, I'd love to hear from you. Please send me an e-mail at maggie dot reardon at cbs dot com. And please put "Ask Maggie" in the subject header. You can also follow me on Facebook on my Ask Maggie page.