AT&T’s New Plan Confirms It: Why Unlocked and Pre-Paid Are The Next Big Things in Wireless

The picture keeps getting better for mobile customers who don't want, or cannot afford, to sign a lengthy contract for a decent smartphone with decent service. Next week, AT&T is making its no-contract service more competitive.

AT&T: Contract-Free

Starting on Dec. 8, AT&T is offering non-contract customers an option called "no annual service contract" on its new Mobile Share Value plans, which can save some smartphone customers $15 per month.

This option can apply to customers who get a new smartphone with no down payment (using the company's AT&T Next yearly smartphone deal), customers who purchase an unlocked smartphone (at full price) - and most importantly - to customers who bring their own smartphone to AT&T or AT&T customers whose smartphone is no longer under contract.

AT&T's move is designed to make the 4G LTE network more competitive in the face of T-Mobile's no-contract "Uncarrier" Simple Choice switchover this year, which lowered monthly rates and got rid of the "two-year agreement" subsidy system. The change in policy for AT&T also reflects the increasing value to wireless companies of attracting prepaid and no-contract customers, which is in turn a reflection of the changes occurring in the smartphone market.

(Quality) Unlocked Smartphones

Just a couple of years ago, if you were using a pre-paid wireless service, you more than likely owned either a bottom-tier junk smartphone - produced by device manufacturers as an afterthought to their more "important" flagship iPhone-emulators - or your phone wasn't even a smartphone.

That's changing. Just this holiday season, after Google unveiled its most recent unlocked (contract-free) flagship smartphone, the Nexus 5, Motorola and others began introducing some high-quality, low-priced smartphones as well. While customers who are likely to stay on contract with their wireless companies can afford to re-up and buy the latest Galaxy Note 3 or iPhone 5s - which are exorbitantly expensive to buy outright without a wireless subsidy - customers who don't prefer a contract, or whose month-to-month financial situation doesn't afford quite as much foreseeable financial stability, finally have really good smartphone options to choose from.

For example, the flagship of unlocked phones, Google's Nexus 5 costs $350 and has the latest Snapdragon processor, a high-resolution screen, LTE, and other features (like swift software updates from Google) that make it almost a top competitor in Android smartphones this year. And for $350, you own it - you're not locked into any plan.

More recently, Motorola released the Moto G, an under-$200 smartphone with HD resolution, a decent processor, and "a guaranteed upgrade to Android 4.4 KitKat" beginning in 2014. Soon after, other cheap, unlocked, good-quality smartphones - each with its own attractive strengths - starting coming out of the woodwork. Apple even began selling its iPhone 5s contract-free and unlocked, for those who can afford it.

Unlocking the Market

Why are contract-free smartphones becoming more common, and why are wireless companies beginning to offer better pre-paid deals? There are several reasons behind the trend, including market forces, technological progress, government pressure, and Google.

First, this year, smartphone manufacturers began to worry about declining returns due to market saturation at the top. That is, the people who are likely to own a top-tier smartphone already do, and aren't likely to want to buy a new one, especially if they get penalized by their wireless company. Analysts attributed this partly to the failure of the HTC One, which is a very nice smartphone, in the market this year (HTC saw its first quarterly losses ever this year).

But as I previously argued, according to smartphone ownership statistics, there's plenty of room in the middle and bottom for new customers, especially if mid-to-low-tier smartphones have more attractive features and specs. Not requiring a contract, as T-Mobile has successfully been able to offer this year, makes the entry point even more accessible and broadens the market for carriers and manufacturers.

Second, following Moore's Law (or actually a market derivative of it) more advanced smartphone components continue to become cheaper to make. Simply put, cheap smartphones can offer better hardware every one-and-a-half years or so. Of course, this is so common that it's a truism: a top-tier smartphone from 2010 would have trouble competing with a mid-range 2013 smartphone.

Third, there's a new sheriff in town (actually, Chairman) and he's fully behind the idea of unlocked smartphones. One of the first actions by Tom Wheeler, the new Chairman of the Federal Communications Commission (FCC), was to write an open letter to wireless companies telling them to voluntarily amend their Consumer Code to allow users the right to unlock their mobile devices after the contract term is up, or else. Technically unlocking cellphones is illegal, under the Digital Millennium Copyright Act, after an exemption expired. But under Wheeler, wireless companies must allow it, or the FCC will act to regulate. So if customers are soon going to be able to take their devices and shop around for pre-paid plans, there's more incentive for companies like AT&T to lower their rates.

Finally, there's Google. On top of the low-cost unlocked phones produced either under the Google name or Google-owned Motorola, Google has made an effort to make lower-powered devices as cutting-edge as the rest.

The biggest change to Google's new Android 4.4 KitKat mobile operating system is not actually a new feature to play with. It's refinements to the underlying code that will make the brand-new Android OS work on smartphones with all ranges of hardware specs, without bogging down the device: KitKat actually requires 16 percent less memory to install than the older OS it's replacing, and it uses a smartphone's hardware about 13 percent more efficiently.

This means that even smartphones with only half a gig of RAM (less than any of the unlocked phones mentioned above) will be capable of running KitKat. Google is itself responding to market forces, with new competitors like Firefox OS that are aggressively going after markets in the developing world, like Latin America, which is also rapidly adopting wireless internet and smartphones.

All of these forces are coalescing to make life easier, more inclusive and more technologically advanced for those mainly left out, or on the margins of the first big wave of the mobile internet. Expect these trends to continue.