Market Insight

AT&T makes a calculated bet on the irrelevance of smartphone subsidies

January 07, 2016

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As of January 2016, subscribers will no longer be able to get smartphones on a two year subsidised contract.

New subscribers will be offered AT&T’s Next plan, and will pay instalments on the full price of the smartphone over a predetermined period of time.

Corporate subscribers will still be able to use the old system.

Our analysis:

The decoupling of service costs and device costs has really caught on with US mobile subscribers since T-Mobile’s ‘un-carrier’ revolution which started in 2013. Just 2 years later, 80% of AT&T’s Q3 2015 smartphone transactions were non-subsidy. Further, 40% of AT&T’s postpaid smartphone subscribers were on their early upgrade ‘Next’ plan. Although some subscribers will still choose to purchase a smartphone outright, many will opt for some sort of financing option from the operator.

AT&T’s is making a bet that demand for the old style multi-year subsidized contracts is negligible. The move by AT&T to remove smartphone subsidy option illustrates the fundamental consumer mind-set shift that T-Mobile’s ‘un-carrier’ moves initiated on the industry. While it promises more options for the time of the upgrade, it does not mean that consumers can come and go as they please. The device instalment plan will still effectively bind the subscriber to the carrier for the length of the instalment plan, but could be paid off earlier. The shift from subsidized devices to paid-up-front or instalments will also benefit the operator will no longer absorb the cost of the subsidy. Instead it will effectively provide interest-free credit.

This will also simplify AT&T’s smartphone plan portfolio. There will still a fair bit of complexity with a smartphone bill, although the breakdown will offer more transparency. Between the service charge, the access charge, the instalment payment, and taxes; the total is still not easily calculated but it will be broken down to each element. Consumers will get more transparency and the possibility of an early upgrade and ultimately AT&T will still maintain its revenues and subscriber base.

The state of mobile spectrum in the US is also a cause for purchasing smartphones directly from carriers. The variety of bands used has historically made smartphones generally incompatible with other mobile networks. This problem is partially being addressed by the releases of multi-band LTE smartphones and the harmonisation of 700MHz band 12 LTE, but 2G/3G compatibility is still an issue. This is a hangover from the CDMA/GSM differences that are prevalent in a market where both were widely used. While consumers may want to completely decouple the handset from the service fees, ensuring network compatibility is often a difficult and time consuming process.

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