Cellphone giants cling to 2-year contracts

John Legere, CEO of T-Mobile US, spoke at the International Consumer Electronics Show in Las Vegas on Wednesday.
AP Images for T-Mobile
John Legere, CEO of T-Mobile US, spoke at the International Consumer Electronics Show in Las Vegas on Wednesday.

Gone are the prohibitive roaming fees and the nickel-a-text-message charges. The smartphone — cheaper and better than ever — is nearly ubiquitous and can be bought pretty much anywhere, too, even the local drugstore.

But through all the upheaval and technological advancements sweeping the cellphone industry, one mainstay holds fast: the two-year contract, that ball-and-chain shackling customers to their carriers.

Despite the best efforts of upstart carriers such as T-Mobile US and its confrontational chief executive, John Legere, industry analysts predict that the nation’s dominant cellphone providers, Verizon Wireless and AT&T, can’t afford to loosen the ties that bind their customers and let them choose their service at will.


“They are trying to do everything they can to keep you as their customer,” said Rich Karpinski, a mobile industry analyst with the Yankee Group, who notes the main carriers have enormous bills of their own to pay for expanding the nation’s wireless networks.

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Not that T-Mobile won’t stop needling its competitors.

In Las Vegas Wednesday, Legere launched a profane assault against the cellphone establishment as he unveiled T-Mobile’s latest scheme to make it easier for customers to drop their old carriers for a cheaper, less restrictive deal from his company.

“What we’re doing is ending contracts for everybody, forever,” said Legere, wearing a bright pink T-Mobile T-shirt and carrying a can of Red Bull on stage at the International CES, the world’s largest consumer electronics show.

“What we are going to do is force the industry to get healthier, force the industry to change. I want every customer to have constant, complete choice.”


In just about every way, Legere is the antithesis of the conservative corporate titans of AT&T and Verizon. During his presentation Wednesday, he swaggered around stage, using obscenities to describe his competitors and their products, and daring them to follow T-Mobile’s lead and tear up their contracts.

His new provocation? Offering to pay up to $650 to offset those onerous termination fees, often in the hundreds of dollars, that keep so many customers from switching carriers.

“We are eliminating pain points,” said Legere.

This followed the company’s decision last year to do away with the industry standard contract, so T-Mobile customers now pay a flat monthly fee and can drop the service whenever they want.

So far, T-Mobile’s strategy of trying to shake up the stodgy wireless industry is paying off. It has become the nation’s fastest-growing wireless provider, adding 4.4 million customers in 2013.


“He’s figured out that in this business public perception really matters,” said Jan Dawson, a mobile industry analyst with Jackdaw Research in Utah. “From a consumer perspective, what T-Mobile is doing is good for everyone. It’s lowering pricing. It’s triggering other carriers to do similar things.”

Neither AT&T nor Verizon would comment.

Both AT&T and Verizon do offer no-contract plans as an alternative to their regular long-term contracts. These plans, which represent a small slice of both companies’ overall cellphone business, have varying options, such as offering more frequent upgrades or installment plans for full-price phones. After T-Mobile eliminated contract plans altogether last year, AT&T discounted one of those options in December.

Then last week AT&T made an even bolder move: announcing it would give T-Mobile customers as much as $450 in credit for moving over to its service.

But analysts said customers should not expect bigger, more dramatic offers from either of the two cell giants, largely because neither company can afford to give up such a locked-in source of revenue and also because many customers appear to be comfortable with the current scheme. For them, a two-year contract in exchange for a cut rate on the latest iPhone is a deal worth making.

“There are an awful lot of customers who actually like the model as it is now,” said Craig Moffett, senior research analyst at MoffettNathanson LLC.

The downside, though, Moffett said, is that “the nature of the contract means that you keep paying for your phone long after you’ve paid it off.”

Indeed it’s these long, legal documents that wed a consumer to their carrier that allows someone to walk out of a Verizon Wireless store with a $200 iPhone 5S instead of paying full retail of around $600. So ending the long-term contract would also mean that consumers would have to pay more upfront. T-Mobile’s shift, in essence, eliminates or reduces the amount of subsidy the carrier offers in exchange for not being bound to a contract period.

“The tricky thing about the end of contracts is the subsidy question,” said Karpinski .

The advent of even cheaper smartphones — Google’s Moto G, for example, costs as low as $99 — may soon make that decision easier for many customers. T-Mobile also offers to finance the full price of more expensive phones, allowing customers to pay off a little each month.

Even though it’s unclear what kind of broader change T-Mobile and Legere may usher in for the wireless industry, he is bringing drama to the staid telecommunications community.

Earlier this week in Las Vegas, he reportedly crashed — and then was kicked out of — a party at CES hosted by rival AT&T. He seems to relish the bad boy role.

“It’s fun to win,” Legere said Wednesday. “It’s even more fun when somebody loses and hurts while you’re doing it.”

Michael B. Farrell can be reached at Hiawatha Bray can be reached at