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.