Ever since wireless companies began offering discounts on new devices to entice customers to sign up or renew their contracts, the carriers have said that the cost of these subsidies is built into the rates it charges for monthly service. That makes sense, as you can’t expect a company to front 70% of a $600 phone without hoping to make that money back over the next two years.
But when you start offering an entire program based on the idea that the customer will be paying the full retail price of the phone, it would seem to follow that these customers would then see a reduction in monthly service rates.
T-Mobile effectively cut its rates when it switched to the “uncarrier” model earlier this year. Yes, it charges full retail price for phones, but customers are also allowed to bring network-compatible phones with them or buy their phones elsewhere. So once you’re done paying for your phone, the total monthly cost of service drops… at least until you get the next phone.
AT&T’s Next program breaks out the full retail cost of the device over 20 months, but doesn’t offer any discount in monthly service fees. That means that AT&T Next customers are not only paying full price for their phones, but they are effectively footing the bill for other customers who get subsidized upgrades.
The same goes with Verizon Edge, which spaces the monthly payments out over 24 months, but allows for upgrades once you’ve paid off half of the phone’s retail price. Once again, the customer is paying more for their phone and paying full price for their service plan.
And Verizon has clearly stated that is has no intention of lowering its monthly rates.
Craig Moffett of Moffett Research tells Reuters “You’d have to be out of your mind,” to go for Verizon’s new Edge program.
Even T-Mobile charges an additional $10 monthly fee for its JUMP program, which takes a huge chunk away from the savings of the discounted wireless service.
One can argue that the reason AT&T and Verizon are continuing to charge full price for the service plans because they are still losing some money from the more-frequent upgrades. With AT&T Next, customers pay for at least 65% of the phone’s cost before they can upgrade, while Verizon requires 50%. But most smartphone subsidies are in the 70-100% range, meaning these companies are getting back significantly more than they could have ever hoped to from traditional customers.
Let’s do some math:
Say a phone has a retail price of $650.
Let’s say the cost to the subscriber for a subsidized phone is $175.
His monthly service plan is $90.
One year of service plus the cost of the phone is $1,255.
At the end of two years, he has spent $2,335.
An AT&T Next subscriber makes monthly payments of $32.50.
His monthly plan is still $90.
After one year, he has paid a total of $1,470, $215 more than the subsidized customer.
If he waits to make his upgrade until 15 months, he will have paid $1,837.50.
Say that no new phone comes out that tickles his fancy and he goes all the way to the 20-month mark. He will have paid $2,450. That’s $115 more than two years’ worth of subsidized phone service.
Under the Verizon plan, an Edge customer makes monthly payments of $27.
The monthly plan is still $90.
After six months, he will have paid $702. He can upgrade if he wants, but that will cost him an additional $163. That’s a total of $865.
It would be wiser to upgrade after 6 months and make that payment than it would to wait out making the monthly payments.
If he keeps making monthly payments for the full year that it would require to reach the 50% threshold, he will have paid an additional $540 in service charges on a phone he could have upgraded.
It’s actually in Verizon’s best interest for the customer to upgrade every six months, as it gets back 50% of a phone’s retail price six months sooner than it would through monthly installments and it locks the customer into another contract.
The notion for all of these plans, including T-Mobile’s, is to encourage contract renewal as frequently as possible. Historically, upgrades have been used as a customer-retention tool to be doled out in the months leading up to the end of a contract, or to lure customers away from other providers.
These programs turn that notion on its ear. This isn’t about rewarding customer loyalty; it’s about putting the customers in a position where they must upgrade by a certain period of time or face the fact that they have wasted hundreds of dollars on a phone they could have gotten for significantly less.