Did AT&t really just start charging full price for devices without discounting their rate plans? OMG. Really? #asktheschoolkids

— John Legere (@john_legere) July 16, 2013

Those were the words of esteemed (and overly-passionate) T-Mobile US CEO John Legere in response to AT&T Next, an early upgrade option to rival his company’s JUMP! program. It’s a very interesting point of view, and one we’ve been eager to explore since hearing about the possibility of AT&T, Verizon, and others introducing their own similar services. Is Legere right? Are competing early-upgrade options rip-offs and shameless cash grabs or nice alternatives?

When T-Mobile first introduced its no-contract plans, the company rewarded users who were willing to bring their own device or purchase one at full price by making their rate plans cheaper. Two-year contracts were originally used as a way to subsidize phones to make it cheaper for customers to buy the phones they want (given a time commitment).

So for T-Mobile, it was simple — no contract should mean a cheaper plan. They’ve been riding that wave for a while, and, with the announcement of T-Mobile JUMP!, are just as serious as ever. Here they are, providing a way for users to upgrade earlier than the next carrier, without a contract and with a cheaper service plan.

T-Mobile’s plans must have stricken a chord with AT&T and Verizon, who almost immediately announced their own competing versions of T-Mobile JUMP! — AT&T Next and Verizon Edge, respectively.

We were wondering what sort of options they’d provide for people looking to go the same route. After all, if consumers are purchasing phones for full price the plan should become cheaper as the need for a subsidy ends. Unfortunately, these new options aren’t quite as sweet as Magenta’s.

The problem comes from the fact that you are paying the same price for your rate plan whether you’re on a contract or not. The idea of a two-year contract is to allow the carrier to sell you the phone at a discounted rate, and they’ll use the plan to recoup the rest of the costs of the smartphone over the course of two years.

Say, for instance, you bought an HTC One for $200 after signing a two-year contract, and your rate plan asks you to pay $80 per month until the contract is up. If the cost of the phone is truly built into the rate plan, that would mean you should be able to get some sort of discount on the rate plan if you were to buy the HTC One at its full price of $600.

Unfortunately, that isn’t the case.

We started reading a bit deeper into the fine details of AT&T Next, and also started thinking about the promise of Verizon Edge despite the limited details provided by Big Red — neither seem to be quite the same as T-Mobile JUMP!

T-Mobile is simply doing it right, but to fully understand the true value we’ll need to dive a bit deeper. Lets “JUMP” right into it!

T-Mobile JUMP!

Simply put, you have to first understand how T-Mobile’s UNcarrier Simple Choice plans make your overall cost of ownership cheaper. Let’s first get a quick primer on that.

UNcarrier Simple Choice plans

Before T-Mobile’s contract-less UNcarrier plans, users would pay, say, $200 for a top smartphone, and would be asked to sign a two-year contract in order to get that price. To buy an HTC One, it used to look something like this:

Cost of phone: $200

Contract length: 24 months

Rate plan cost: $70 per month

Total cost: $1880

Early termination fee (with more than 180 days left on the contract): $200

Now, under UNcarrier, you’d be ditching the contract for a cheaper rate plan as that has become standard practice across the entirety of the T-Mobile network. Suddenly, that same phone would cost the following:

Cost of phone: $100 down payment, plus 24 installments of the rest of the cost of the phone ($20 for this example)

Commitment length: 24 months

Rate plan cost: $50 per month

Total cost: $1,780

Early termination fee: remaining balance of cost of phone

As you can see, the new plans save you $100 upfront, yet both plans still come out to be $70. per month The only difference is where that money is actually going — with UNcarrier, $20 of that is paying down your actual device.

With the freedom to leave T-Mobile whenever you want without an early termination fee now (by simply paying the remaining balance of your phone) you aren’t charged more than what you need to be charged, whereas the old plan cost you an extra $200. It’s not a huge difference, but it’s a difference. So let’s see how JUMP! figures into all of this.

T-Mobile JUMP! explained

T-Mobile JUMP! is quite simple, really:

Pay $10 per month

Buy a new smartphone twice a year

Pay for your phone with a low-cost down payment equal monthly installments over 24 months

The main catch with JUMP! is that you have to have the service for at least six months before you can “upgrade” to your first smartphone, and you have to trade your old phone in if you aren’t finished paying it off (which you likely wouldn’t be if you’re upgrading that often).

Some might ask: “but if you have to pay $10 per month to use it, and you can only begin using it after 6 months, what’s so good about it?” That $10 per month also acts as an insurance plan — something you were probably already paying for anyway. The $60 you’d pay for T-Mobile JUMP before being afforded your first early upgrade is negligible in that regard.

If your smartphone is broken beyond repair but you want to take advantage of JUMP!, you simply pay the deductible to get it replaced, and trade the replacement smartphone in for the new one you’re looking to buy under JUMP!

And, again, all of this means your plan is cheaper — cheaper than T-Mobile’s old contract plans, and definitely cheaper than what the competition is offering. That’s the way it should be, and that’s why we were excited when T-Mobile announced the program.

AT&T Next

Enter AT&T Next. When I first read the press release, I was very excited to learn that AT&T users would be afforded similar luxuries as those on T-Mobile. As we did with T-Mobile, let’s see how AT&T’s cost of ownership breaks down with a contract vs going month-to-month.

AT&T’s Plans

Since AT&T’s plans have been the same for quite some time, we’ll explore their current cheapest individual contract option vs their current cheapest individual month-to-month options, and show how that differs from T-Mobile’s model.

With a contract, you’re paying the following for your typical smartphone:

Price of phone: $200

Contract length: 24 months

Rate plan cost: $80 per month

Total cost: $2,120

Early termination fee: $325 (minus $10 for each full month completed)

Without a contract, it looks like this:

Price of phone: $600

Commitment length: month-to-month

Rate plan cost: $80 per month

Total cost (after 24 months): $2,520

You might be able to see where we’re headed by now — AT&T’s plan doesn’t get any cheaper for ditching the contract. But let’s not jump too far ahead of ourselves. What is AT&T Next poised to bring?

AT&T Next explained

Under AT&T Next, users can buy a new smartphone without a contract for no down payment, which means the phone is paid for in 24 equal installments. They can upgrade that smartphone once every 12 months, there is no down payment to pay for the new smartphone, there are no activation fees, and there are no financing fees. In order to upgrade in this matter, you have to trade your old smartphone in.

Although you haven’t fully paid for your existing phone, you’re able to trade in your phone to cover the remaining costs. Basically, the phone is a rental. Sound like a good value? Let’s move on to Verizon’s offerings before we finally discuss whether these are insane deals or the ultimate cash grabs.

Verizon Edge

Not to be left out, Verizon has officially unveiled its early upgrade option. It’s named Verizon Edge, and it’s set to launch August 25th. Knowing Verizon’s reputation for being one of the most expensive in the game, we were even more curious than we were about AT&T’s Next. Like we’ve done twice before, let’s break down Verizon’s total cost of ownership.

Verizon’s Plans

We’ll only compare Verizon’s contract and month-to-month options as of the post “Share Everything” era. With that, let’s take a quick look at total cost of ownership in both situations, starting with the standard two-year contract:

Cost of phone: $200

Contract length: 24 months

Rate plan cost: $90 per month

Total cost: $2,360

Early termination fee: $350 (minus $10 for each full month completed)

And now, going the month-to-month route:

Cost of phone: $600

Commitment length: month-to-month

Rate plan cost: $90 per month

Total cost (after 24 months): $2,760

Like AT&T, Verizon’s rate plans cost the same whether you’ve signed a two-year contract or not. With that, Verizon wants to give folks a way to ditch their contracts and be able to upgrade to a new smartphone every 6 months. Let’s talk about Verizon Edge, shall we?

Verizon Edge explained

Verizon’s giving you the chance to go month-to-month with a way to buy a smartphone with no down payment (you’d pay for it in 24 equal installments), as well as the ability upgrade to a new smartphone every 6 months.

The catch is that you must have paid for at least 50% of the smartphone at the time of upgrade, which you can pay at the time of purchase if you haven’t already reached that point through your monthly installments. Here’s a quick list of what Verizon’s advertising:

No down payment except the first month’s installment

No finance charge

No upgrade fees

The ability to upgrade to a smartphone after 6 months if you’ve paid off at least 50% of the full MSRP cost of your device (you can pay up to the amount you need if you haven’t reached it by that time).

Unfortunately, Verizon has yet to disclose the full terms of this new program. There’s no fine print, and Verizon has not responded to questions regarding things like trade-in requirements or whether or not the service is subject to an approved credit check.

What AT&T and Verizon don’t want you to know

Ready for the big reveal? These carriers just found a way to get you to pay for the same device twice.

That’s where the concept of subsidization comes into play. AT&T and Verizon’s — and any other contract carrier’s — rate plans are inflated as the true cost of a smartphone under contract is (unofficially) built into the cost of the plan over 24 months.

The companies don’t communicate this to consumers, and it’s not an “official” pricing model, but this form of subsidy gives them the ability to make as much money as they feel is appropriate for a smartphone they initially sold to you at a discounted rate.

So if this subsidy really does exist, shouldn’t your monthly plan be reduced by the amount that was tacked on due to subsidy? Consider the average price of a new smartphone under subsidy — about $200. You’ll find that even after the minimum of 12 months you’d need to use the phone before activating AT&T Next, or the 6 months before activating Verizon Edge, you’d have paid the same cost twice. How?

The charges from the monthly installment

The costs incurred from the built-in subsidy

T-Mobile is the only carrier that appropriately reduces your monthly service charge for buying a phone full price.

The Dirty Math

Let’s break it down: T-Mobile dropped the cost of its off-contract plans by $20 when it introduced its new plans, and worked it out so most of their smartphones are paid off after 24 installments of $20 (following a low-cost down payment). Let’s assume AT&T and Verizon also valued their subsidization model at $20 per month over a 24-month period.

Using AT&T’s $600 HTC One as an example

If you were to spread the monthly installment payments out over 24 months, you’d be paying about $25 per month before taxes, fees and any possible insurance. After 12 months (where you now have the option of upgrading using AT&T Next after trading in your old phone), that comes out to about $300 for that HTC One. However, you’re still paying the same price for your plan as those who decide to stay the contract route.

Bringing back that $20 subsidy figure we’re using from T-Mobile’s plan structures, you’d be paying AT&T an extra $240 in that first year. This doesn’t include the $10 per month T-Mobile JUMP! fee, but keep in mind that acts as your device’s insurance.

Add the $300 you paid for the phone after 12 months of installments and the $240 that you would have saved if AT&T discounted the plan by $20, and — hypothetically speaking — that’s $540 you are paying for that smartphone.

A phone that was once $200 on a two-year contract is now costing you $540 to own for just a year before trading it in for a new one ($60 less than full MSRP). Let’s not forget AT&T would profit off selling that refurbished phone at a later date.

And even if you didn’t opt to get a new smartphone and instead decided to tough it out for another 12 months, you’d pay the remaining $300 and another $240 that you probably shouldn’t have to. Add all that up, and you could argue that the true cost of that smartphone has just become $1080. Suddenly, it seems like you paid for the same phone twice. One might be better off just buying the phone full price in the first place, using eBay to “upgrade” from that point forward.

For Verizon

It’s a similar story. You have to pay off at least 50% of a phone before you use Verizon Edge to get a new one, so you’d need to pay $300 of that $600 for the HTC One. Again, if Verizon were to give users a $20 discount for being on a month-to-month track that would be a savings of $240 per year.

The difference between Verizon and AT&T is that Verizon has yet to clarify whether or not you’d need to trade that old smartphone in. Since they haven’t said it, we’ll assume you’re still on the hook for paying off the rest of that first smartphone you bought. Verizon’s plan also differs in the amount of time you have to wait between each upgrade.

Verizon requires at least six months, but if you can get 50% of the smartphone paid off by then, you’re not necessarily being forced to drag out 12 or 24 months worth of payments (which is a slight advantage, but not enough to make us happy).

Off the hook

T-Mobile decided to play the honest role, telling consumers that — yes — they deserve a discount for buying their smartphones for full price. They have decided to let the subsidy secret out of the bag and let users know that they definitely should be entitled to discounts if they aren’t being bound by a contract and buying their phones at discounted rates.

Verizon and AT&T, on the other hand, won’t acknowledge that. The subsidy policy is internal and, in a way, rather unofficial. Since Verizon and AT&T don’t publicly disclose their reasons for setting their rate plans how they do, offering the phones at the discounts they do, and why they require users to sign a two-year contract to get that discount, they don’t have to admit to any of it.

For them, their rates have always been standard no matter which track you go through, and these new month-to-month, early upgrade plans are simply seen as an alternate route to the same destination. AT&T and Verizon would call foul on the notion that users should rightfully be saving an extra $240 or so each year, because on the outside they will pretend they don’t know what a subsidy is.

There’s not much you can do but vote with your wallet. It’s within these companies’ rights to do this, and the only thing they have to answer to are the quarterly and yearly financial results.

Same old song and dance

The obvious solution would be for AT&T and Verizon to do the honest thing and lower the price of their rate plans for those who decide to go the month-to-month route. Whereas T-Mobile is trying to move the wireless industry in a direction that favors consumerism, other carriers are using this opportunity to find new ways to make more money by putting makeup on a butt ugly pig.

In essence, nothing has changed if you were already on the month-to-month track with AT&T and Verizon, and buying your devices outright — no discount on your monthly rate means you’re paying more than you should be. It’s as simple as that.

I shouldn’t single out those two, either — Sprint and many others still do this, and whenever they offer their own early upgrade options I wouldn’t be surprised if they were just as terrible of a deal.

The core problem isn’t in the early upgrade programs themselves, but in the way rate plans are structured. They’re structured to allow carriers to make their money back on subsidized phones, but you’re charged the same price whether you bought your phone full price or not.

As a real example, take yours truly: I’m paying the same for month-t0-month service on Verizon after buying a $700 Samsung Galaxy Note 2 as someone who signed a two-year contract to get that same phone for $200. That’s not right, and these companies’ plans and philosophies need to change before we really start commending them for these early upgrade options. That’s why T-Mobile’s strategy works and has people excited, whereas I let out a huge sigh whenever I think about AT&T Next and Verizon Edge.

Some will still find value in AT&T and Verizon’s offerings. Whether it be due to their inability to leave as part of a family plan, not wanting to ditch a grandfathered plan, or not being satisfied with T-Mobile’s coverage, there will always be consumers who would only leave these companies under the most extreme circumstances. For those folks, these early upgrade solutions are viable options they didn’t have before.

But for everyone else, T-Mobile is the better deal, and it will remain that way until these other carriers start navigating the wireless telephony industry with a pinch of sense, and a desire to help consumers that’s bigger than their desire to squeeze as much money out of them as they can.

Bottom Line

It boils down to this: T-Mobile gives you a discount for buying your phone full price. AT&T and Verizon don’t. Therefore, their early upgrade plans are inherently flawed compared to T-Mobile’s because their entire rate plans are flawed to begin with.

T-Mobile succeeded in its goal of making carriers think about new, innovative services to offer people while without conjuring up a misleading way to make more money, but it didn’t go down the way we wanted it to. Let’s hope T-Mobile’s continued aggressive strategy puts enough pressure on the other guys, and that the results of their latest changes force their rivals to truly compete at some point in the future.

How do you feel about all of this? Do you see T-Mobile’s plan as a better value, or do you think their options aren’t any better or worse than the competition’s? Do you feel that AT&T and Verizon are getting away with a new cash grab, or do you think it’s alright since the concept of a device subsidy is seemingly non-existent to them? Chime in below, and be sure to come to your own conclusion after considering all the facts.