AT&T CEO: Carriers Can't Afford Big Subsidies for Devices Any Longer

[joe-h2o]

I'm not from the US so I don't know quite what the pricing is like over the pond, but here in the UK the iPhone subsidies are looking less and less enticing. When I signed up for a contract with the iPhone 5, getting a subsidised phone saved me money compared to buying it outright and signing up for a rolling monthly tariff.

I did the same calculations for the 5S, and it's substantially cheaper to just suck it up and buy it outright. Plus, you then have the added bonus of an unlocked device that isn't tied down to a carrier. If the networks think I'm going to be giving them £50 every month for the next two years they can jog on.

I partially did this on O2 just a few days ago - I used the new split plan to get a 5S, which I paid for partially up front (about half the cost, but you can choose how much from minimal up front to fully buying the phone) plus the airtime contract.

I think it's great. The O2 guy also mentioned that I can pay off the phone part of the contract at any time to reduce my monthly bill with no early payment penalty etc. He mentioned that at that point they would also unlock the handset so I could travel with it (I visit the US frequently).

Given that I paid for half of the phone up front what they've effectively done is given me a no interest loan for the the remainder since I'll probably chip it off over the next couple of months and then own the thing outright, and just carry on with the cheaper airtime contract (which is £3/m less than the iPhone Simplicity plan I was on with my iPhone 4 before this).

TLR - O2's new split plan is basically allowing me to stage payments on a 5S, and leaving me with a £3/month cheaper phone plan than previously. Not bad at all.

Before looking at these plans I was just going to buy the phone from Apple outright.

 

[ThatGuyInLa]

I'm not going to shell out $700 for a new phone every few years. Are they crazy?

Lol. Most are paying more than that from subsidy phones and overpriced plans. Boost and MetroPCS have shown the $30 to $40 a month truly unlimited strategy works. Users buy a phone they can afford and everyone wins. They offer phones from free up to $500.(ip5c/s)

If you can't pay $700 upfront, try a cheaper phone. OR go for the 0% financing. You are already doing that with your bloated subsidy plan as is.

 

[gotluck]

Att gophone is the best deal on att for most people. Subsidies are a rip off. This new strategy appears to be more of a rip off than gophone as well. Bring your own device, be free from their control.

 

[vea1083]

My take on this article.

Well, I read this and I can only think of these two situations...

1. This may not be good news for Apple and Samsung who depends on customers upgrading their devices every year to two years. I guess not too many people will be very happy about the idea of putting down $800+ for a newer device when there's not much of a differenciator from the previous generation model.
2. On the other hand this move would benefit Nokia and Microsoft who have made already a relatively viable business model selling cheaper phones in developing market in Asia and Europe places where subsidized phones are rare to non existent.

This is an interesting read and actually how the smartphone has changed the telecommunications world since it became mainstream in 2007 with the original iPhone.

I'll be watching this space...

 

[clibinarius]

Sell me unlimited data and we can talk. I don't want this unlimited voice/text I keep reading about. Those are obsolete with Data.

In France, I can get data for much cheaper than in the US. Bring that here.

 

[12soldier]

Lame

AT&T always has an excuse to rip off it's customers. They started by eliminating the unlimited plans, then they created these "buckets" of data at very high prices, then they started this extra fee process to upgrade whenever, and now they claim they can't subsidize phones. Total BS!!! They had no problems years ago when a basic phone was alleged to cost $500, but you could get it for $150 with a contract. Now we have these smart phones and pay much higher rates than back then, circa 2001, and they can longer subsidize? NO!!!! They are just tired to creating contracts with phone manufacturers and not living up to the terms. They would have no problems if their service were more reliable and affordable. So if they don't subsidize are we going to see lowered rates or the unlimited plan return? I doubt it. Screw you AT&T!!! You've always got excuses and reasons to price gouge.

 

[tbone0726]

Looks like a plan to allow AT&T and Verizon to pocket more money and charge the same or more money for your contract. You just wait and see.

No subsidy, no contract!!

 

[thebeans]

I'm kind of dense but...

Go ahead and stop giving me a subsidy. I'll go to Verizon or Sprint.

...I don't really understand the whole subsidy thing. The phone costs the provider a certain amount. I assume it is less than the $649 (as an example) that an individual would pay for 1 phone since they are buying them by the thousands or millions. Let's say they get a new customer and the customer pays $199 for the phone. The difference between the $649 and $199 is considered the subsidy, right? That is the portion of the cost of the phone that the carrier pays. If the customer is on a 24 month contract then that $450 is collected back from the customer in the form of inflated monthly prices. We pay about $75 or so per month for an iPhone on Verizon. AT&T is offering a plan for $45 per month for customers who buy or already have a phone. So that's $30 per month X 24 months or $720 extra that the customer pays over 2 years which is quite a bit more than the $450(or less) the carrier paid for the phone. So how exactly is this unsustainable? How are they losing money? I know this is not a perfect analogy since I am using numbers from AT&T and Verizon but their costs are likely similar. Bottom line is that even if customers upgrade every 2 years they still make more $ than charging for access only and having customers BYOP. If the customer keeps their phone past the 2 years, then that is just extra profit for the carrier since they keep charging the customer the price that reflects recovery of the subsidy after the subsidy has already been paid back by the customer.

 

[e-coli]

Stephenson:
"can't afford to subsidize devices like that"

AT&T Quarterly Earnings Call in October:
"AT&T Reports Strong EPS Growth with Solid Wireless Gains, Record U-verse Results in the Third Quarter"

3.8 Billion in PROFIT last quarter

Corporations exist to make money for their shareholders. That's the whole point. A CEO who doesn't take steps to advance the company's profits is derelict in his duties.

That said, I think we're getting screwed here in the good ole' US of A, and it's eventually going to start hurting business here. What we pay for data and internet is absurd.

 

[ChrisA]

There seem to be two sets of people commenting on this
(1) Set A, those who can't do math
(2) Set B, those who can.

Those people in the first group still, even in 2013 think they are getting a "free" phone. If they where able to add up the payments they made every month over the life of the contract they would see they are paying about $1,000 for their "free" phone.

Getting a free from is about as badd of a deal is buying a full price phone on a Visa card then taking two years to pay off the bill.

Those who can do math are pretty existed about this deal, getting very low cost finning or the option to bring your own phone (that maybe you bought used on Craigslist) to the deal is far better. Then there are no early termination costs to pay off the subsidy.

I'm surprised the phone company would do this because the first group is 10x larger then the second and those subsidized contracts force costumers not to leave


But NOW. I buy a phone as near zero interest and I can sell it in 6 months and buy another if I like to always be up to date. No penalty. Of I could be the guy buying that 6 month old phone and save some cash over a new one. It's better for everyone Well, except for those who still think their phone is free.

 

[DaReal_Dionysus]

Id be interesting to see what kind of impact would apple get on sales if all major carriers went that route....

Bet Apple drops the price of the phone to the pricing of the subsidy even without the the carriers help.

 

[alexkywalker]

"Transformative" you say?

How about a-la-carte plans? Buy your own damn device, get whatever plan you want, from whomever you want.

Now that's transformative.

PS - Cable, you're next!

 

[thebeans]

No Eating

If all the carriers say no more subsidies who would be hurting more, the customer or the supplier? Apple and Samsung don't want to lose those sales and if the providers decide not to eat the cost anymore people won't buy expensive phones. Forcing the suppliers to lower prices.

Nobody is eating any costs. The customer pays for the cost of the phone with the inflated monthly plan costs.

 

[BiggAW]

Go ahead and stop giving me a subsidy. I'll go to Verizon or Sprint.

Wow. Reading comprehension fail. They are giving people $15/mo off their plans for not taking the subsidy. Which means Apple might have to finally get their act together on pricing, as Google is charging $400 for a Nexus 5, while Apple charges $750 for the equivalent (32GB) iPhone 5s.

 

[dysamoria]

If they can no longer afford the subsidy model, then the monthly plans should be cheaper since users are paying for their own device full price.

That sounds logical but the big three are greedy and want us to pay full price for the device and continue to pay the same price for the plans that payed for the subsidies.

Exactly. That's all this is about. They just want to increase profits. This has nothing to do with an "unsustainable business model". What's unsustainable is the greed of the board of directors. If the stock value doesn't climb perpetually, the business is unsatisfactory. If the profit margins do not climb perpetually, the business is unsatisfactory.

It's the insanity of greed.

 

[Colpeas]

Yeah well charge me less for your service if I buy my own device outright and then we can talk about it.

Well, here in the Czech Republic it's been this way for a couple of years now. We pay lower monthly fees than before, but the phones are not subsidised at all. No one complains.

 

[j26]

I don't know much about the relative size or network quality of US carriers, but this makes a lot of sense for the carriers. When they "subsidise" a phone, they have to tie up some of their capital. If they just sell airtime, then there's no need to do so, and that capital is available for either;
(a) reducing the price of the service to gein a competitive edge
(b) invest in the network to improve it, gaining more potential customers
(c) return it to investors through dividends
(d) acquisitions

The return on capital employed greatly increases, improving the value of the company to potential investors.

Let's take as an example. It was quoted above that the average subsidy is for an iPhone is €450. If a carrier has 10 million customers who upgrade every year, that is €4.5bn capital that is tied up in handsets. That's capital that could be better used on network improvements to improve the carriers competitive position.

The carrier doesn't want to sell phones - they want to sell you air time, preferably on a regular monthly plan as that gives them a steady flow of income. Deferring the cost of your phone is just a way to tie you into a contract that gives them that income flow. Selling the phone is not an end in itself.

The likely long term implications of this are;

• People will go for mid range phones more than high end as the cost of the phone will become apparent and people are price conscious (Nokia is doing very well at driving Windows Phone in Europe as it has produced a very good budget phone in the Lumia 520).
• The monthly cost of monthly plans will fall as carriers try to maintain their regular cash flow situation in the face of more transparent competition.
• Networks will improve as more is invested in networks as carriers attempt to reach more customers.
• There may be some rationalisation in the number of stores that carriers operate, leading to further reductions in costs for the carriers.
• Eventually the financing of phones will be outsourced, and fees and interest charges will apply.

All in all, the customer will win significantly in most of that.

 

[redscull]

This is only true if you replace your phones every two years. Even in this case it looks like you counted the remaining value of the phones after 2 years for scenario with subsidies but missed it for a new scheme (it's about $1200).

In addition, with new scheme if you do not upgrade your phones every two years your savings increase.

I showed both the 2 year and 4 year upgrade model. At 2 years, the old plans are hands-down cheaper overall. At 4 years, the old and new plans are roughly even on cost (which I said), but cost isn't the only factor. At 4 years on the old plan, you have a 2 year old phone. At 4 years on a new plan, you have a 4 year old phone. For the same total cost. That's crappier, though not more expensive.

There is only a savings using the new plan when you upgrade on a longer cycle than 4 years. To put this into perspective, had these options always been the case, that means people still using 3GSs, that got them where they were first introduced, are just now realizing a savings over the people using the subsidized plans, who all either have 5Cs or 5Ss now.

I didn't forget any factors, though I specifically didn't compare other scenarios, like less/more data or less/more shared phones. As someone else pointed out, my case (10GB, 4 phones) is the sweetspot that benefits least (negatively, in fact) from the new value plans.

 

[alent1234]

I showed both the 2 year and 4 year upgrade model. At 2 years, the old plans are hands-down cheaper overall. At 4 years, the old and new plans are roughly even on cost (which I said), but cost isn't the only factor. At 4 years on the old plan, you have a 2 year old phone. At 4 years on a new plan, you have a 4 year old phone. For the same total cost. That's crappier, though not more expensive.

There is only a savings using the new plan when you upgrade on a longer cycle than 4 years. To put this into perspective, had these options always been the case, that means people still using 3GSs, that got them where they were first introduced, are just now realizing a savings over the people using the subsidized plans, who all either have 5Cs or 5Ss now.

I didn't forget any factors, though I specifically didn't compare other scenarios, like less/more data or less/more shared phones. As someone else pointed out, my case (10GB, 4 phones) is the sweetspot that benefits least (negatively, in fact) from the new value plans.

i have both an iphone 5 and a galaxy s3. at this point both can be used a lot longer than 2 years with no issues. very different than when the 3GS first came out

 

[redscull]

Those who can do math are pretty existed about this deal..

Except there is a group C, those who can do math well, who calculated that the "savings" on plan cost does not have the same monetary value as the subsidy. They are not that excited because the subsidy, when taken advantage of, was the best deal. AT&Ts bean counters are in group C; they are excited though, because they profit more by denying customers the best deal.

 

[Macbmw]

T-Mobile hallo effect. No surprises here.

 

[JackEagan]

Awww too bad

Well thats why I have Verizon I think AT&T is already a big rip off with the reception I get. AT&T you just completely lost my business, And I don't even upgrade yearly, I upgrade every two years. I think thats already giving my cellular provider enough money considering how much I spend per month and how many restrictions are placed on me....

 

[hansonjohn590]

AT&T's idea of a 'subsidy' is a joke. People who own their phones or buy them outright pay just as much monthly as people who are subsidized.

 

[AppleScruff1]

And your point is?

Google can afford to sell their nexus line of phones at near cost because they expect to eventually earn it all back as advertising revenue. They are earning every time someone uses maps or search.

Apple's business is in hardware. That price you pay for the iphone also covers other "invisible" costs like processor design, OS updates, cloud services (mail, Siri, maps, iCloud etc), as well as shipping, warranty and so on. All these earn apple no profit on their own, yet help sell the end product, and so has to be factored in anyways.

I won't say apple products are cheap, but I do feel they are fairly priced for the sort of quality and user experience I am getting.

Why not read the post I replied to? My comment may make sense then. Apple's net profit is in the 30% range. Net profit is after all expenses as far as I know. The post I replied to implied that Apple's profit got chewed up paying engineers, etc. When they report a net profit of $8 billion, this is after all salaries, expenses etc.

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When I read the headline my first reaction was: An glad I am not an Apple Share holder. Much of Apple profits come from the iPhone, due to the high profit margin they are sold at. The reason Apple come sell the iPhone with such a high profit margin is the subsidised carrier model in the US.



Kantar Worldpanel number from MR

Image

You see that iOS has higher marketshare in the US than the EU or AU, this is largely due to the the high monthly cost of smartphone plans in the US that have allowed carriers to subsidise higher end (~$650+) smartphone.


All iPhones get a $450 subsidy. 450/24 months = $18.75 per month of the your plan that effectively goes straight to Apple. A $15 per month discount is actually low.

Thank you for posting. This is the chart I was talking about.

 

[portishead]

Wow. Reading comprehension fail. They are giving people $15/mo off their plans for not taking the subsidy. Which means Apple might have to finally get their act together on pricing, as Google is charging $400 for a Nexus 5, while Apple charges $750 for the equivalent (32GB) iPhone 5s.

No they aren't. That's just what they want you to believe. You just had a logic fail.

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LOL, you don't think Verizon will follow? If you think Verizon is better, go for it. I love these ridiculous comments about leaving AT&T. Just go!!! and good luck on the antiquated network

Where has Verizon said they would do this? Oh yeah, they haven't.