Early last year, T-Mobile's (NYSE:TMUS) launched its Uncarrier crusade against its domestic rivals. The first part of its Uncarrier strategy was to eliminate two-year service contracts in favor of installment plans. On top of that, T-Mobile introduced a new program that allowed for frequent smartphone upgrades, and T-Mobile Jump was born.
While the math doesn't necessarily work out favorably for most users, the other carriers all inevitably jumped on the bandwagon. Within a matter of months, AT&T (NYSE:T) launched Next, Verizon (NYSE:VZ) rolled out Edge, and Sprint introduced Easy Pay. These early upgrade programs have soared in popularity in recent months, according to a recent study by NPD.
Enrollment in these plans has jumped from 7% in September to 31% by the end of the first quarter. However, some consumer confusion persists, and NPD believes that carriers have an opportunity to further spur adoption if they work harder at consumer education. The structures vary by carrier, which makes comparing them slightly intimidating.
Regardless, early upgrade plans are absolutely having an impact on the industry. Just this week, AT&T said it now expects second-quarter postpaid subscriber net adds to top 800,000, which would represent its biggest gain in almost five years. Smartphone sales through its Next program have been on the rise and are expected to comprise half of smartphone sales. Half of Ma Bell's postpaid smartphone subscribers are now on Mobile Share Value plans that involve no subsidy.
Verizon said last quarter that Edge helped boost EBITDA to the tune of $165 million because of lower subsidy expense. That helped Big Red's EBITDA margin by around 90 basis points. Verizon has been the most resistant to caving to the pricing pressures that T-Mobile is applying, but eventually it has to play ball if that's where the industry is heading.
Despite cutting prices in February to match AT&T and T-Mobile, Verizon CFO Fran Shammo said in May that the company would not "overreact" to any competitive pressures since there's no going back. It's much easier to lower prices than it is to raise them, after all.
The rising adoption of early upgrade plans may potentially benefit smartphone vendors. While they should become somewhat more price sensitive since the full retail price can cause sticker shock, the whole point is to facilitate more frequent upgrades overall. That could very well translate into higher unit sales.
The subsidy model has been in place for over a decade and done the industry a lot of favors. It's also not easy to get rid of, as several European carriers like Vodafone Spain and Telefonica experienced a couple of years ago. The key difference this time around is that U.S. carriers aren't asking consumers to quit subsidies cold turkey; they're offering an alternative in the form of installment plans.
T-Mobile continues to make waves and is even planning on hosting an Uncarrier 5.0 event later this month. What does the Magenta carrier have up its sleeve next?
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Evan Niu, CFA, owns shares of Apple and Verizon Communications and has options on Apple. The Motley Fool owns shares of Amazon.com and Apple and recommends Amazon.com, Apple, and Vodafone. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.