Get your subsidized iPhones while you can, AT&T CEO says the deals can’t last

“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,” Ben Lovejoy reports for 9to5Mac.

“‘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,’ [Stephenson said].” Lovejoy reports. “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.”

Read more in the full article here.

39 Comments

  1. Subsidy model has always been very good for carriers. As soon as subscriber completes their two-year contract, they essentially start ‘donating’ free money to the carrier (subsidy doesn’t disappear after the phone has been paid off). I know a number of people who take pride in the fact that they are now “off-contract” and paying month-to-month (“They don’t have me by the b@lls anymore, I can leave whenever the h3ll I please!”), and their carrier is laughing all the way to the bank.

    The only problem with the subsidy model for the carrier is that the subsidy part of subscriber’s monthly bill is taxed as wireless service, and not as retail tax on hardware. Wireless service taxes are much higher (in may states above 20% !!), while retail tax on mobile phones is well below 10% in most of USA. This difference ends up representing almost $100 on the price of a new iPhone. Neither carrier, nor consumer, gets this money; it needlessly goes to the government. Buying a phone up-front, or financing it on 0% two-year loan (like on T-Mobile) makes much more sense, since the phone is then taxed as a retail sale (well below 10%), and the carrier can pass at least some of the saved money onto the consumer.

    1. American business, the so-called free market capitalist system, absolutely depends on customers who are bad at math and are willing to do things that are not in their economic best interest.

      The wireless carriers do not subsidize one nickel of the cost of an iPhone. At the end of the 2 year contract, they have recovered all costs for the hardware and provided you with two years of service, all at a profit. No carrier subsidy, just a payment plan in disguise.

      They used to able to keep your phone locked to their network, even past the end of your contract. That’s when the customers began subsidizing the carriers, by continuing to make payments on their already paid-for phones. That’s not happening now. Pretty soon the iPhone will be back to one universal model that will work on any carriers network with the proper SIM card. AT&T can provide low cost loans for hardware, or not. Without the loan, there is little incentive for anyone to enter into a contract. Everything will be pay as you go. Hopefully customers will shop for the best service and cost package for them.

      I put these statements down to saber-rattling, part of their negotiation with Apple on the purchase price for iPhones in bulk.

  2. People, you keep looking at this wrong. Nobody here is seriously proposing that the only available non-subsidised option is buying the phone up-front at full price. Look at T-Mobile’s model for guidance: buy the phone on a 24-month 0% loan. You have no carrier contract, you can upgrade anytime you wish, you can even switch anytime you wish. There is no early termination fee (since there is no contract). All you have to do is pay of the remaining balance on your phone and you can get a new device and a new loan right away. In almost ALL cases, the remaining balance on the loan will be much lower than the residual value of your old device on e-Bay or CraigsList. You pay the balance, buy the new phone, sell the old one and cover all the costs of the exchange. This is much more flexible than being locked into a two-year contract, and/or having to pay early termination, or premium upgrade fee to get a new phone sooner. In all instances, these fees are much higher than the value you’re getting for them.

      1. Yea, I would be on T-Mobile right now, except their coverage is the pits in my town. Thus I stay with AT&T who even with all their faults are still better than Verizon when it comes to gouging their customers.

    1. And with the service plan cost divorced from the cost of the phone people will be able to shop for the cheapest plans. Service plan rates should begin to drop with competition. The horses are out of the barn. Too late to shut the doors, AT&T.

  3. This is the second wake up call for Apple. The first was the too damn expensive 5C. First T-Mobile, now AT&T soon after the rest will follow. The only one’s becoming UBER wealthy are the manufactures Apple and Samsung. And to a lesser degree the carriers and as for the end users, well, they’re the cattle.

    The “it costs the same” model is dying as there will be fewer people that will say yes I’ll purchase (at full price but carrier financed) a new phone every year as carriers do away with the old model especially when some of these phones are averaging $650.

    1. As I said, you’re looking at it wrong. Wherever subsidy model is complemented with a non-contract, post-paid model with full retail purchase of a phone, the perception is of an advantage. You feel liberated (no longer a slave for two years to your carrier), you are now able to hold onto the phone as long as you wish, or upgrade as soon as you like, and you don’t feel like you’re overpaying your carrier for the subsidy. With the subsidy plan, you never know how much you’re actually paying for your phone, but you are quite certain it is more than the retail price of the actual phone. With non-subsidy plan, it is all clear. The service plan price is only for the service, the phone cost is only for the phone, and if you’re paying it off in monthly interest-free installments, you know exactly how much you owe and when it will be paid off. You are in complete control and free.

      The consequence of this is that many more people will begin upgrading every year, instead of every two years, because by the time the new phone is released, the remaining balance on their installment plan may well be a very manageable $230 or so. A year-old iPhone will always fetch at least $400 on e-Bay (or CraigsList).

    2. All premium phones cost about the same no matter who makes them and ATT’s ideas are pure bs and have nothing to do with Apple Samsung HTC Motorola, LG or any other phone manufacturer. Like has been said multiple times in this thread ATT does not pay one thin dime for your phone subsidy. You pay for your phone over the life of the contract.
      People will still buy the phones they will just finance them separately just like T mobile is doing right now. One the phone is payed for the service is all you will pay for. Unlike ATT’s current 2 year subsidized plans, on which when you pay your phone off you still pay the subsidized price regardless and give the carrier free money out of your pocket.

  4. Money Grab. I’ll be more than willing to bet you that while prices for service go down somewhat without the subsidy, the difference won’t make up for the cost of the phone… which REALLY means a PRICE INCREASE for service.

    1. We’ll have to wait and see what AT&T does with this, but if T-Mobile is any indication, the deals will end up being cheaper for the consumer. Which only makes sense, since right now, taxes are needlessly eating almost $100 of the value of every new iPhone (see above for explanation). With non-subsidy model, this absurd taxation is gone, and at least some of the savings are passed onto the consumer.

  5. Any company who’s management thinks they need to “move into maintenance mode” is doomed to failure.

    I’m on the AT&T family plan. If it weren’t for our rotating eligibility for upgrades, we would have probably moved to another carrier long ago. (one that doesn’t charge us extra just to tether the data that WE ALREADY PAID FOR!)

    We use to stay with AT&T (Cingular) because of the free AT&T to AT&T cell calls, our whole extended family is on AT&T, but that’s not relevant anymore.

    If you are no longer going to be aggressive with subsidies, why should we stay with you in the future?

    1. Essentially, you are stuck. Perhaps the only way to move would be to remove each additional family line as they expire and send them temporarily to SIMple Mobile, or T-Mobile prepaid. You could put them on the cheapest plans over there ($30 or so, I believe), until all that’s left is the two main lines on the AT&T family plan. Once they expire, move everyone to the carrier of choice (currently T-Mobile is the only one with no-contract post-paid offerings). T-mobile doesn’t charge for teathering, offers UNLIMITED everything (with tiered pricing for data throttling, with everything clearly explained, so you know exactly what you’re paying for). If their coverage works for you, you should really bail out as soon as possible, even if you have to pay early termination on some of your lines. They are positively the cheapest main player out there.

      And if you travel overseas on occasion, their free data roaming is a remarkably unique (and attractive) feature.

      And no, I don’t work for them and have only been a(n obviously satisfied) customer for some 8 month now.

  6. ATT does NOT “subsidize” iPhones. (A loan is not a subsidy.) ATT sells phones on installment, after receiving a downpayment and a obtaining a signed 2-year contract that requires consumers to pay minimum monthly payments to ATT. Monthly fees cover (a) principal & interest on your “loan”, and (b) normal fees for cellular service.

    In theory, buying a phone outright and buying it “on installment” are substitutes. Perfect substitutes mean that most people would be indifferent between either option. However, I suspect ATT makes more money selling phones on installment, because this is what they would prefer to do. Obvious, no? They are: (1) charging high interest rates, (2) tying consumers to lucrative contract terms, or (3) receiving “windfall” revenues from those customers who do not upgrade to new phones (and new contracts) by the time their phone is fully paid off — or all 3.

    Carriers should unbundle their charges so consumers can see, and fairly compare, terms for buying their phones on installment vs outright, and the fees they are being charged to buy normal cellular service.

    I thought there were laws against this sort of abusive, anticompetitive behavior ? We need a good consumer advocate: where are the journalists, analysts, lawyers, & regulators ? WHERE IS THE DOJ ???

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