Almost a year ago, the final major U.S. wireless carrier eliminated its two-year contracts and people celebrated the end of constricting mobile plans.
One of the biggest perceived advantages was the simplicity and transparency that this change would bring to mobile service plans. However, over a year later, consumers are still left with confusing terms and conditions when purchasing new mobile phones.
If you take a look at today’s “new and improved” mobile plans, it might seem like we’ve moved away from the traditional subsidy pricing models—but are we actually drifting back to the subsidized phone-buying plans of old?
A Look Back at Subsidy Pricing Models
For years, carriers have been selling us subsidized smartphones in exchange for two years of guaranteed service. That meant that even though the latest iPhone cost $650 at the Apple store, we could go to Verizon, AT&T, Sprint or T-Mobile and buy the latest iteration for something like $200 (or less).
The problem is that the carriers weren’t just giving phones away for a third of retail value—you really paid for it through the pricing of wireless service over the course of your contract. In the subsidy pricing model, it was almost impossible to determine what you were paying for service vs. what you were paying for the mobile device itself.
Worse yet, these two-year contracts came with hefty early-termination fees if you wanted to leave early for another carrier. While you would own your new phone outright after the two-year contract, you likely took advantage of an 18- or 24-month upgrade offer and continued to pay for subsidized devices.
Competition and the rising cost of these subsidies ultimately led the wireless carriers to move away from this subsidy model and to separate the device purchase from the ongoing pricing for the service. They also introduced financing plans for the device purchase which allow the consumer to pay for the device over time.
For consumers, the new installment-based financing plans do offer more transparency into the price of a device vs. the cost of service. In some cases the sum of these two pieces is less than consumers had been paying previously for service under the two year contract subsidy model. Yet, these installment plans may not be as different from subsidy models as we might think.
Why Installment Plans and Promotions Are Starting to Resemble Contract Pricing
New plans that don’t technically include a contract still have a potentially costly agreement for consumers. Instead of locking yourself into a two-year service agreement, you lock yourself into a 24-month installment plan.
With these new plans, carriers are upfront about how much a new device costs. For example, the base model of the newest iPhone could cost around $650 and carriers will let you pay the full price over the course of 24 months—about $27 added to your bill.
If you choose to exercise your right to leave the service at any time over these 24 months, you will be required to pay the balance of your device payments—a more transparent version of the early termination fees you paid in subsidy models.
The similarities between subsidy models and today’s installment plans are magnified when you consider promotions for new devices. The big 4 carriers recently all offered trade-in promotions for the new iPhone 7 which would give you a free iPhone 7 in exchange for your used iPhone 6 or 6s. This sounds like a great opportunity for consumers; but it’s really just a contract with a new look!
The carriers are essentially saying that they’ll pay the $27 per month for your new iPhone over the course of 24 months. If you stay with your carrier for the full 24 months, you won’t have to pay for that new iPhone. However, if you leave the service early, you forfeit the remaining balance of the promotion and have to pay a hefty remaining unpaid balance due for your device purchase. Sound familiar? This is very much like the large early termination fees consumers were subjected to under the contract subsidy pricing model.
So are we back to carrier subsidy models? Sort of. Phone-buying options are certainly more transparent than they once were, but it’s clear that the process is still confusing. Luckily, carriers are so focused on stealing customers from one another that they often offer to pay a consumer’s switching fees.
Consumers have more power than ever in the phone-buying process. However, if you want to learn more about the mobile trade-in industry and how to expand your customer base, contact us today or download our whitepaper.