Not long ago, when you bought a cell phone in the United States, you very likely signed a long-term service contract to go with it.
That practice is now the exception, not the rule.
According to new data from Kantar Worldpanel, just 20 percent of smartphones sold in the United States in the three months ending in August were tied to traditional contracts. As recently as 2013, some 78 percent of smartphones sold were tied to those long-term service agreements.
Instead of signing two-year contracts, a large and growing number of consumers are purchasing smartphones on installment plans. These types of agreements, which T-Mobile pioneered in 2013 and the other major carriers later copied, look a lot like the old contracts, but have important differences.
Like the old agreements, the new installment plans tend to be for two-year terms. And like those old contracts, consumers pay a set amount each month that includes a certain amount for the cost of their phone.
But unlike with the old contracts, consumers can cancel their service and switch carriers at any time under the new plans. Although they are liable for any remaining amounts they owe on their phones, they typically can change their provider without paying any kind of penalty or fee.
The new installment plans also frequently allow consumers to purchase new phones without paying a downpayment. Under the old contracts, consumers often had to pay $100 or more up-front if they wanted to upgrade their phones to the latest models.
Meanwhile, many carriers are offering deals that allow consumers on the installment plans to trade in their old phones for new ones before the two year period is over, often by paying an additional fee.
As of the three-month period that ended in August, about 47 percent of all smartphone sales in the United States were sold on installment plans, according to Kantar. The remaining 33 percent of smartphones sold were tied to pre-paid agreements, where consumers typically pay the full cost of the phone upfront.
One of the key features of the installment plans is that they make clear the full cost of the smartphones consumers were buying. Under the old contracts, the cost of the phones was subsidized and hidden, and consumers often didn t realize how much they were actually paying for them.
Some in the smartphone industry feared this new transparency would depress sales of higher-end smartphones, noted Carolina Milanesi, who heads up Kantar s research team. They worried that if consumers knew that an iPhone actually cost $650, rather than the $200 they paid upfront, they d be less likely to purchase it and would opt for a less expensive model instead.
But that doesn t seem to be what s happening, Milanesi said. Of those consumers who purchased an iPhone on an installment plan in the three months that ended in August, the vast majority — 77 percent — purchased one of Apple s two latest models at the time, the iPhone 6 or the iPhone 6 Plus. Likewise, among those consumers who purchased a Samsung phone on an installment plan in the same time period, 48 percent purchased one of the company s two latest — and highest priced — models, the Galaxy S6 or the S6 Edge.
File photo: A consumer exiting a T-Mobile store in Glendale, California (Robyn Beck/AFP/Getty Images).
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