More Customers Give Up the Cellphone Contract

Maybe Tony Soprano was onto something. As the lead mobster in the HBO series “The Sopranos,” he and his crew often turned to prepaid cellphones, presumably to avoid wiretaps.

But now these pay-as-you-go phones are winning over fans for different reasons — recession-battered consumers are buying them as a way to cut costs and avoid the lengthy contracts and occasional billing surprises that come with traditional cellphone plans.

“Frugal is the new chic,” said Joy Miller, 33, a piano teacher in Aubrey, Tex. After almost a decade on contract plans with Verizon Wireless, Mrs. Miller and her husband decided this month to test-drive a few prepaid plans, including MetroPCS. “In today’s economy, it’s not cool to pay $120 a month for a phone. It’s a waste of money.”

Although prepaid phones remain a fraction of the overall mobile phone market, sales of the category grew 13 percent in North America last year, nearly three times faster than traditional cellphone plans, according to Pali Research, an investment advisory firm. For the first time in its history, T-Mobile has been signing up more new prepaid customers than traditional ones. And Sprint Nextel is betting that a new flat-rate prepaid plan will help it wring more value from its struggling Nextel unit.

Any stigma attached to the phones — they are a common prop in any show or movie about gangs and spies — is falling away as prices drop and the quality of the phones rises. Prepaid carriers like MetroPCS, Virgin Mobile and Sprint’s Boost Mobile division now offer sleeker handsets, better coverage and more options, from 10-cent-a-minute calling cards that customers refill as needed to $50-a-month, flat-rate plans for chatterboxes who want unlimited calling, Web browsing and text messaging.

The savings can be considerable. An AT&T customer with an Apple iPhone on a traditional plan pays at least $130 a month, excluding taxes and fees, for unlimited calls and Web use. Compared with the $50-a-month, all-inclusive prepaid plans, the iPhone owner pays nearly $1,000 more over the course of a year.

Prepaid customers typically have to buy their phones without the subsidies offered with a contract. When Jerry Cruz, a manager at a tanning salon in Manhattan, switched to T-Mobile’s prepaid service, he paid more than $300 apiece for Sidekicks, which feature keyboards and cameras, for himself and his daughter. But, he said, he saves at least $40 a month compared with his previous contract with Sprint. “Every dollar I save goes towards something else.”

MetroPCS, a carrier based in Dallas that sells only prepaid plans and just added New York and Boston to its network, said it has seen a lot of interest from people who are “cutting the cord,” or abandoning their landlines to use only a mobile phone.

“Over 80 percent of our users use our phone as their primary phone,” said Tom Keys, the company’s chief operating officer. MetroPCS added 520,000 subscribers in the fourth quarter, the biggest quarterly gain in its six-year history. MetroPCS finished 2008 with more than five million subscribers, a 35 percent increase over 2007.

Charlie Bournis, owner of Champion Wireless in Brooklyn, said his prepaid business doubled in the last year while sales of traditional contract plans plunged.

“In 2001, we would sell upwards of 100 contracts per month,” he said. “Now, maybe we do 10.” The store sells 100 prepaid refill cards each week, he said.

Boost Mobile’s $50 unlimited-everything prepaid plan, introduced last month, has helped stoke demand, said Mr. Bournis.

“Over the holidays, all of our Boost Mobile handsets were just collecting dirt,” he added. “After they announced the $50 plan, they sold out within a week. It doesn’t make any sense to get a contract anymore.”

Prepaid plans are generally offered in two flavors. Customers can buy pay-as-you-go cards, with $20 providing 60 to 200 minutes of calling time that must be used within a specified period. Some prepaid companies also offer flat-rate monthly plans that resemble traditional plans except that customers pay upfront and have no continuing commitment. Customers can even switch back and forth between the types of prepaid plans depending on their needs.

Wireless carriers are ambivalent about the growing popularity of prepaid services. They would prefer to sign up customers with good credit to long-term contracts. But as the overall mobile phone market becomes more saturated, they are looking for growth wherever they can.

Sprint and T-Mobile, the No. 3 and No. 4 carriers in the country, are particularly aggressive about courting prepaid customers. In the fourth quarter, 355,000 of the 621,000 customers that T-Mobile added were prepaid users.

Prepaid phones are not for everyone, said Peter Pham, chief executive of BillShrink, which offers free analysis of consumers’ cellphone bills and recommends cheaper plans that match their calling patterns. Some carriers, like MetroPCS or Leap Wireless International’s Cricket, have limited networks or charge extra for roaming outside regional zones.

The trick, he said, is for consumers to figure out their calling needs and pick the plan that make sense. “Saving $15 to $20 a month is a big deal these days,” Mr. Pham said.