If both the contract and prepaid services had both the same phone features and rates I would have to go with the no contract. The point of the contract is to make money from what was loss from that "$300 dollar phone marked at $50 dollars." Seems like a good deal at first, but in today's economic woes for 2009, a contract can be seen as a potential lethal boa waiting to constrict its prey. Even the major cell-phone companies are feeling the squeeze as having to lay off thousands of their employees, not to mention the citizens without a job.
Another point is the phone quality. The downside to prepaid is the quality of the phone and the pricing of it. To be honest pre-paid cell-phones are priced as though they are "newer," but some of them can be as old as 4-years or more (and the quality of the phone can be junk). Is a 4-year old phone worth that $129.99 or $169.99 that a company is asking? How about $200 or $300?.
However assuming that the features are exactly the same and the rates on both contract and prepaid, I would have to go with the prepaid phone. Paying that $200 plus that extra $40 for service is a lot upfront but in the long-run can be saving. With the freedom of no binds (coughcontractscough) a person can use the same features as a regular cell-phone and STILL have the freedom to turn their service on or off basically at any time.
The last thing anyone wants is to be stuck with no money and having to pay a whopping $200 early termination fee on top of any other fees associated with a contract because of events happening in this time of uncertainty.
No Contracts! Period!
I would pay fair market value on a phone. I would pay up to $150 for a decently featured phone (camera, web & of course, phone). Don't do much shopping online so that isn't important, nor are texting features (use couple times a week). Best battery would be a top feature that would swing me to buy, and/or phone that connects my laptop via USB. Those two features together would sway me into purchasing.
"No Contract" with the rapid changing of the guard in telecommunications advances, one could be stuck in a contract with obsolete equipment/technology (or have to ante up more bucks to upgrade). No-brainer IMHO....