The rise of no-contract smartphones

8:30 AM nocontract, smartphones No Comments

| By Michelle V. Rafter, MSN Money

With Apple’s new iPhone 5S and 5C devices, the company joins others cutting the cord between mobile phones and contracts.

Buried in Apple's announcement of not one but two new iPhones last week was news that anyone can buy one of the devices without having to sign up for a two-year contract.

The news makes Apple the latest company loosening the connection between phones and contracts to make their products and services more appealing to customers.

That's not to say the new iPhones are a bargain. Buy the top-of-the-line iPhone 5S with a two-year contract, and you'll pay $199 for a basic 16-gigabyte model. Without a contract, the same phone is $649.

Prices for the less tricked-out iPhone 5C, built with a candy-colored plastic case instead of glass and aluminum, start at $99 with a contract. Without a contract, you pay $549.

Apple's move is being taken as a sign of its renewed push to sell products in places like Japan and China, where buying a phone without a contract is more common than in the United States. When Apple starts shipping new iPhone 5 models to U.S. customers on Sept. 20, shoppers in China and elsewhere for the first time will be able to pick one up the same day, instead of waiting weeks or months.

Before the new iPhones were introduced, analysts and Apple watchers had expected the company to debut a cheaper phone specifically for consumers seeking a noncontract device, so the relatively high price of the iPhone 5C surprised some. "We view the lack of a true 'low-end iPhone' as disappointing," Merrill Lynch analyst Scott Craig wrote after the announcement. "We believe the 5C is unlikely to be competitive in the lower-end smartphone market, where phones tend to be under $300 (prepaid phone with no contract)."

One of the chief reasons for getting a no-contract phone is flexibility. Without a 24-month agreement tying you down, it's easier to switch carriers if you're not happy with your service, data plan or other terms.

Not having a contract also makes it simpler to upgrade when the next generation of Apple, Samsung or Nokia phones appear, which typically happens more frequently than the average 24-month cellphone contract.

No-contract phones may be more popular outside the United States, but the past year has seen major U.S. carriers such as Verizon, AT&T and T-Mobile ease up on contract policies and restrictions.

The Verizon Edge plan, introduced in August, lets customers pay for a new phone in 24 monthly installments instead of in a lump sum up front. Customers on the plan can upgrade to a new phone after six months if they've paid off at least 50% of the cost of their existing device. Customers need to have an existing Verizon contract to qualify for the new plan, which covers smartphones and basic cellphones but not tablets; once they do, though, there's no long-term service agreement.

AT&T unveiled the similar AT&T Next plan in July. With it, customers pay for a new phone or tablet in 12 monthly installments, and once the device is paid for, they can keep it or trade it in for a newer model. AT&T Next, like no-contract plans from other carriers, doesn't include the upgrade and activation fees typically included in long-term contracts.

T-Mobile was the first company to unbundle phones from services, announcing in December 2012 that customers would have to pay $300 to $800, or more, for a phone up front or in installments added to their monthly bill, part of a move to position itself as the "un-carrier."

Since then the company has picked up 1.1 million new customers, according to InformationWeek. Customers are moving to T-Mobile because the company is "fixing the things that drive them mad, like contracts and upgrades, and freeing them from the two-year sentences imposed on them by our competitors," T-Mobile CEO John Legere said in August when the company announced its quarterly earnings.

Other major tech players reportedly are considering the no-contract phone market. Reports surfaced recently that Amazon could be developing a smartphone patterned after the Kindle that would be sold without requiring buyers to sign up for a lengthy service contract. According to a Digital Trends report, Amazon phone users would buy music, books and other media through Amazon, much the way Apple users buy from iTunes and Android phone users get downloads through Google Play.

Amazon responded by saying it will not launch such a phone this year, and that if and when it does, such a device won't be free. However, the company reportedly is also testing a wireless network, fueling rumors that a phone is on the horizon.