AT&T’s CEO Randall Stephenson told investors yesterday that with smartphone penetration approaching 90 percent, the existing business model – where carriers sell highly-subsidized smartphones to drive demand – will have to change.

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.

Many U.S. iPhone buyers don’t realise the true cost of their handsets, as carrier subsidies mean they typically pay no more than $200. The full retail cost of those handsets, however, ranges from $549 for a 16GB iPhone 5c to $849 for a 64GB iPhone 5s. The balance is paid by the carrier, then clawed back through the contract payments … 

Carrier business models are changing, with T-Mobile the first to separate monthly fees for device and phone service with its Uncarrier program back in March. AT&T seems to be thinking along similar lines, with CNET reporting that the company saw the future in financing, rather than subsidizing, devices.

Stephenson also acknowledged that breaking customers of their habit of upgrading to a new phone every 18 months to two years is not an easy task. But he said a business models focused on financing rather than providing a subsidy would be “transformative” for the industry. He said the company’s new AT&T Next program, which offers no-money down and 0-percent financing, drives smartphone penetration in a way that is more sustainable over time.

It’s not all bad news for consumers, however. In the UK, where subsidies are much more visible, all carriers offer the option to pay full price for the phone in order to get much cheaper monthly service fees. As an example, I bought my iPhone outright at full retail, and as a result pay just £15 ($24) a month for unlimited voice calls, texts and data. Upgrading every other cycle means I typically save $3-400 over the course of two years.

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31 Responses to “Get your subsidized iPhones while you can – AT&T says the deals can’t last”

  1. You pay $30-35 more on a plan for a subsidized iPhone for three years in Canada. That is not subsidized that
    s a high interest laon.

    • You mean 30 dollars more a month? So the phone costs 1100 bucks? +200 initially, so 1300 for an iPhone? In the U.S. they charge us 200 for the phone, plus 8 percent tax, plus 50 dollars in fees and shit, so about almost 300 dollars. Unless you’re on a family plan, or work for a company that gives you 10% off your bill, phone bills for the 2 year contract run around 100 bucks a month. How does that compare with Canada’s plans?

      • As a Canadian consumer I can answer. I chose to purchase my phone outright, saving me between $500-$570 over a three year period. The subsidized plans were about $75 dollars a month, for 500 minutes, Unlimited texting and 1gbs of data. I bought my phone on a ‘financed’ system, known as the Koodo Tab, they take $150 dollars off the price of your phone, and then apply a monthly credit to the debt each month – they credit is 10% of your bill – but it is not an additional fee. So if your plan, like mine, was: $56 Unlimited Talk, Unlimited Text and 2gbs Data – then $5.60 is subtracted from the outstanding balance on the Tab. If you choose to pay in full without the Tab, then the plan is the same price and that 10% becomes free money that you can use to buy merchandise – but not pay for your plan. Yes, $30 a month more is the average for Canada. (My difference was $20/month but the two plans were not quite equal)

  2. I’m already done with contracts. I consider the difference in paying the full price of the phone to be the price of freedom. The value of U.S. cellular service from major carriers is relatively quite poor IMO (your mention of what you pay in the UK is a prime example of that), and I want the ability to adjust or switch my service and phone if I’m not satisfied with the current value.

  3. Marklewood at Serenity Lodge says:

    Doesn’t really matter what the big companies do. You can bet we’ll still be paying through the nose and their profits will continue to soar .

  4. Moises Soto says:

    I can’t understand why they keep saying they are subsidizing the phones… I’ve worked on the mobile industry for a long time, and you can be sure this have never been the case.

    When you commit to a two year contract, the amount you pay monthly is not only paying for the services you get. It is paying for the phone itself.

    Not only that. In less than two years they will have recovered the amount they implicitly financed but you will continue paying the same amount for your monthly bill. So the earnings for customers that stay on contract after the two years are massive.

    Before Apple came into the bussiness it was even worse. The MSRP for some handsets was the same as it is today, around $600, but in reality those handsets were manufactured for around half that amount (I’m looking at you Motorola). And the handsets were sold to them at very discounted prices when compared with the MSRP. When they gave you a $600 set for $200 they were actually only financing $150 or so, instead of $400.

    Now the game changed, and of course they are earning less, but still they don’t give you anything. They think the consumer is stupid and will eat everything they say. But times are changing. Let’s see how this turns out for them if they go that route….

    • Ben Lovejoy says:

      Yes, they subsidize the up-front cost then make you pay for it over time – and, as both you and I observed, that costs consumers more in the long-run.

      • I believe that Moises Soto may have been taking exception to the use of the term “subsidy”. You’re right, Ben, to the extent that the carriers provide a form of loan…the critical question, which is what I believe Mr. Soto is getting at, is what constitutes a “subsidy”? By definition, a regular loan you’d get from a bank is NOT a subsidy; it is a financial transaction and the consumer pays for the privilege of borrowing via interest payments. A subsidized loan is one in which either a producer or government puts additional money INTO the arrangement, such that the burden of the purchase to the user is lessened. Mr. Soto’s point is that the carriers are obviously making SUBSTANTIALLY more from their “subsidy” programs, and the consumer is paying SUBSTANTIALLY more, than the retail price of the handsets. Only perversely can that be called a “subsidy”. A true subsidy from the carriers would see very low or no interest loans, or even carriers offering phones at a discounted price. T-Mobile’s plans and Walmart’s program are much closer to a true subsidy, since they are effectively low-interest loan programs. The deals around Black Friday with carriers dropping $50 to $100 off the retail prices of phones would also qualify. But in no way can AT&T claim they “subsidize” the iPhone when, by basic math, their contract customers pay significantly more than the ETF over the 24months when compared to their no-contract AIO or GoPhone (and MVNO) pricing. Plus the consumer is left with a carrier-locked device and must beg AT&T to remove the shackles.

      • Ben Lovejoy says:

        I agree with your points, it’s just the accepted industry terminology for that business model. It’s interesting, though, that AT&T sees it as an expensive one given they do recoup the costs, especially in these days of low interest rates.

      • And I guess that’s my point, Ben, and Mr. Soto’s…we need to call out the carriers and inform consumers. This is tantamount to a fraud. The carriers are claiming they are “subsidizing”, but words have meaning. And “subsidy” does not mean what AT&T is claiming. They are getting away with it by slight of hand, by hiding what the costs of their plans are. But it is easy today to expose them, as was done with AT&T’s NEXT Plan (a total sham, financially). You used the words “highly subsidized” and “clawed back”; but those are industry words. And they’re inaccurate.

        For instance: AT&T’s AIO Wireless offers iPhone no-contract service with unlimited talk, unlimited text, 2GB of 4G LTE data and unlimited throttled data, and Visual Voicemail for $55 a month. So any amount of money above and beyond that is the cash that AT&T is “clawing back” from contract customers. I don’t know many iPhone users under contract with a comparable plan (most with 3GB for $30 and $20 for unlimited texting (of which they use next to none but more than $20 in “messaging” fees)) paying less than $100. So that means AT&T is “clawing back” approximately $45 dollars a month. Throw in some questionable “fees” and it is even more. The “subsidy” discount they’re going to be offering out-of-contract customers is $15 a month. They’re STILL higher than both T-Mobile and Walmart’s loan programs. Over two years, that is $1080 above the upfront cost; on a 16GB iPhone 5S, that’s 140% simple interest, or the same as a monthly compounded credit card rate of 45%!

        In no way can the words subsidy or discounts be used in reference with AT&T. They both should be used in quotations. Further, using “highly subsidized” is absurd. More like “high interest loan”. Which is -exactly- what Mr. Soto indicated.

      • Ben Lovejoy says:

        We’re not disagreeing at all about the facts. That’s precisely why, here in the UK, I always pay full retail to buy my (unlocked) phone outright. I am then not locked into a contract – I could switch carriers once a month if I wanted to (and keep my phone number each time).

      • I don’t think they plan on changing how consumers pay for phones one bit. Instead, they will change how this is explained to the consumer. Rather than say your phone costs $200 and your plan is $75, they’ll say that your phone is “$200 down” and your plan is $65 and a $10 phone payment – very similar to a how people purchase cars or houses. This will allow customers to speed up or slow down the phone payment system, say they want to pay $35/month for their phone and have it paid quickly so they can upgrade to another phone sooner. On the other hand they could say that they’ve already been with one service provider for 10 years and cut there monthly phone payment to $2.50. Explaining to customers the how they are really paying for their phones will encourage people to trade in and upgrade more. If my iPhone 5S is selling for $400 dollars to third party sites, and over the last year I paid $20.75/mth towards my phone – I now owe $200 on my current phone and can afford the $200 for the new model too. This will encourage upgrades and trade in programs – helping companies move from producing last years model to sell this year, offering a lower price and selling all last year iPhones as refurbished to consumers – most likely in other countries like India.

      • Ben Lovejoy says:

        That’s certainly possible, but if you look at the UK market, where the subsidy is more visible, separating the two means you have the choice of paying less overall in return for an up-front payment for the handset. Interestingly, that makes you think more about whether a particular model has enough appeal to justify upgrade because you are fully aware of the total cost of the handset.

    • Tallest Skil says:

      >>I’ve worked on the mobile industry for a long time, and you can be sure this have never been the case.

      So you say it has never been the case and then you say it has always been the case, huh. Great.

  5. PMZanetti says:

    Somebody depose this bastard already. He is the worst CEO in the history of the world.

  6. weakguy says:

    Crap. I’m on a family plan, so subsidized iPhones are to my advantage. This is not looking good… Well, I’m on a three year old 2GB plan as well. Maybe I can’t have a new contract with the same plan anyway. Guess we’ll find out next year. Or maybe someone here already knows AT&T’s policy?

  7. The second that AT&T eliminates subsidized phones, they will also have to eliminate the 2 year contract. ( They will just invent a new reason for contracts – cheaper monthly service ).

    This will cause 2 things to happen – 1) a drastic price reduction from the manufacturer to stay competitive and continue selling high unit counts. 2) the people who can only afford the $199 “subsidized” price will end up switching to whichever device falls into the $199 and under catagory.

    The minute that AT&T makes this change, I will be switching to Virgin Wireless. We would save $50 a month on our monthly family package which would pay for plenty of phone upgrades along the way and no 2 year contract!!!!

    • Brad Meyer says:

      The problem is….. they WON’t reduce their rates. It will just be the same expensive rate but with a new added cost to consumers. Just becuase you get your phone off of contract here in the states doesn’t mean they give you cheaper rates on calls/data/texts. You still pay the same, sans the 2-year contract. So there is ZERO incentive (other than to not be on contract) to pay full retail price.

  8. olvepeersen says:

    Subsidize my arse, is more like it – as has been pointed out, the AT&T “subsidy” is nothing more than a high interest loan that does not go away when you’ve paid off the balance, so the longer you keep the phone the higher the effective interest. T-Mobile seems to .be doing quite well by not offering a subsidy per se, but rather a simple 0% interest loan to their service-playing customers, and that loan payment goes away

    By taking this away, AT&T will likely lose revenue in the long run, but who known how badly they’ll continue to gouge people on their service price. They certainly have a great network and fairly good coverage that has cost them a lot of money to install (and continually upgraded from EDGE-3G-4G-LTE), but thus also a lot of financial pressure to recoup costs, I suspect. The real problem is that they’re just to a bit too sure of themselves when assuming that everyone needs that level of service all the time, and they’re clearly hurting as more and more people are figuring out the alternative carriers do a quite sufficient job at delivering data and that the occasional weak spots in other networks are tolerable in light of the cost savings.

    That said, I did move 3 end-of-contract iPhones form AT&T to T-Mobile, and there’s a 4th coming with an early termination because when it costs $60/month on AT&T (line, data, texting for a teenager) and $10 on T-mobile then the math is pretty straight forward. When all 4 lines are moved, my total cost will be cut in about half, saving about $100/month, which ironically is $1200 per year, which in turn becomes the upfront cost of four new iPhones over two years. But the difference is that I don’t to upgrade until I feel it is worth the money or my phone breaks.

  9. topwebch says:

    in switzerland, if you are subscribed with something like at&t your iphone become free

  10. Well isn’t this the genius behind the hold “Next Plan”, and such that these companies are offering now?

    I get to pay you a monthly fee for my phone ~$30(or so), in 12 months I can give you that phone back, and upgrade to a new phone. Or I can pay till 20 months and own it. (which you get to sell my “refurb” phone to someone else after I trade in)

    Meanwhile you have not reduced my monthly phone charge which has a built-in payment for the phone that you subsidised for me. So I am now paying ~$50 per month in phone payments alone, before you have added my service, and data fees back into everything. Now with your Next plan you could have bought a couple of new phones.

    Don’t we all feel sorry for the guys making 7-digit incomes now? Then again we are just stupid sheep that need to be herded.

  11. Yeah but it’s not going to be “Much” cheaper. It’s going to be 10-15$ cheaper, and we’ll still have insane costs for slow, pokey spotty coverage from all the major carriers.

  12. James Katt says:

    Since you are paying for the subsidy yourself over a 2 year contract, obviously the subsidy can continue. Otherwise, customers will switch to the carrier who continues the subsidy. Verizon anyone?

  13. I think we have the right to expect unlocked smartphones if we have to pay the full price, whether all at once or in installments. I’d probably select my carrier based on which ones sold unlocked iPhones, or would buy an unlocked iPhone from Apple. Listen up, AT&T!

  14. In the UK me, and the closest people I know normally buy the phone outright then have a sim only plan. For example when the iPhone 4s came out I paid £499 (~$818.61) and then £12 (~$19.69) a month thereafter.