For the longest time, wireless carriers have operated on a business plan that subsidized hardware in exchange for locking customers into a pricey two-year contract. The logic was that the almost pure profit these carriers pulled from subscriptions helped to make up the cost of the phone. Now one carrier isn’t so sure of that business plan anymore.
CNET reports that AT&T CEO Randall Stephenson was at an investor conference this week where he touched upon the company’s need to move away from subsidizing smartphones. He noted that it was an acceptable cost when they were trying to get people to use smartphones, but it’s a little more complicated now that 75 percent of AT&T’s subscribers use smartphones. Those subscribers expect to upgrade to the newest model every two years with a heavy subsidy to pay for it. Stephenson says that it’s just not financially viable:
“When you’re growing the business initially, you have to do aggressive device subsidies to get people on the network. But as you approach 90 percent penetration, you move into maintenance mode. That means more device upgrades. And the model has to change. You can’t afford to subsidize devices like that.”
So, what does AT&T intend to do about the rising cost of smartphones? For starters, the carrier is now going to encourage subscribers to keep their phones for more than two years. A new plan was introduced that knocks $15 off a subscriber’s monthly bill if they opt to keep their current phone instead of upgrading after two years.
The other, more attractive, plan is to follow in T-Mobile’s footsteps and offer financing. In other words, subscribers will pay the usual small fee up front and then pay off the rest of the phone in installments over a two year period. Subscribers are still locked in for the two year period, and AT&T doesn’t have to absorb the majority of the phone’s cost. It’a a win-win scenario for the carrier and one that Stephenson “see[s] the market going.”
Besides changing how the carrier sells phones, Stephenson also said that AT&T must encourage its subscribers to use more data. In other words, AT&T’s move to get rid of unlimited data plans worked as more than 70 percent of its subscribers are now tiered pricing. As data consumption becomes more prominent, AT&T stands to make a killing as more subscribers switch to higher tiered data plans. In fact, Stephenson sees mobile video as the next big thing and that alone will drive up data usage to new heights.
The mobile industry is now in a state of change thanks to T-Mobile switching to its popular un-carrier approach to selling smartphones. While AT&T and Verizon will never offer unlimited 4G data, both carriers are already adopting T-Mobile’s approach to financing smartphones and upgrades. That means consumers aren’t going to see much of a change in their upfront costs, but they will end up paying more in the long run if carriers ditch subsidies altogether in favor of financing.
[Image: Wikimedia Commons]