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The Next Battle in the Smartphone Wars: Phone Subsidies

http://www.fool.com/investing/general/2013/07/19/the-next-battle-in-the-smartphone-wars-phone-subsi.aspx

Doug Ehrman
July 19, 2013

While there has always been healthy competition between the major wireless carriers, to date, the heart of the smartphone wars has been between devices. In March, T-Mobile (NYSE: TMUS) became the first to take a meaningful step away from phone subsidies, setting in motion what is becoming the next major battle for your smartphone consumption dollars. With AT&T (NYSE: T) and Verizon's (NYSE: VZ) recent announcements  of their own "early upgrade" plans, the conflict is intensifying.

There are two central questions which this transition raises, namely, the need to understand what is really happening and who will benefit. Without digging into what these changes really mean, it is difficult to trace the impacts. Ultimately, it is the impacts of these changes that will affect us as both consumers and investors.

Spin versus reality
T-Mobile, AT&T, and Verizon are marketing their new plans as a way for consumers to upgrade their hardware more frequently. In the case of T-Mobile's JUMP! plan, customers are able to upgrade as often as twice a year, but they are required to pay for the new device on an installment plan, as well as pay a $10-per-month plan fee -- but the plan fee includes insurance on the device. AT&T Next only allows you to upgrade once each year, requires no upfront down payment, and has no additional charge for the upgrade option. Verizon Edge is a blend of the two, allowing upgrades twice per year, requiring no fee for Edge, but requiring that you pay off half of the device before turning it in for your upgrade. ZDNet's Mathew Miller does a side-by-side comparison that does a nice job of walking you through a concrete example.

The clear conclusion for consumers is that, while these new plans allow you to upgrade more frequently, they are significantly more expensive than traditional options. This is no surprise to anyone paying close attention to the reality of what these plans represent: the end of phone subsidies by carriers. Where the added cost gets really out of control is if you choose not to upgrade as quickly as possible. Each of these plans contains an installment-payment feature, meaning that choosing not to upgrade forces you to keep paying toward your existing device.

In the case of Verizon Edge, this might make sense until you have reached 50% of the device's price -- if not, a lump sum payment is due at the time of upgrade to reach the 50% level. For the others, however, you continue to pay for a device you could replace. In the case of AT&T Next, which only permits an upgrade once per year, by the time you upgrade, you have already paid for more than half of the cost of the device, based on the example of having the device fully paid in 20 months.

For both of these carriers, there is no price break on monthly service fees, and some industry experts believe these rate plans already contain fees to offset the cost of phones. It is this last reality that led T-Mobile's Chief Marketing Officer Mike Sievert to suggest that, under AT&T's plan, customers pay for the same device twice.