The End of an Era

February 1st, 2014 - AT&T Tweaks its mobile share pricing

Before the resurgence of T-Mobile, before its quirky CEO introduced the idea of competition back into the U.S. Carriers -- The U.S. phone market was calm and predictable. Dominated by two carriers, the mobile landscape was stable enough to allow a premium phone company to establish itself as the dominant player. Customers of both carriers, grumbling about the cost of service, nevertheless enjoyed large subsidies that brought high priced smartphones within the reach of the general public.

Apple, in a large part driving this subsidized pricing structure through an exclusive deal with Cingular and AT&T in 2007, benefited greatly from its terms. The subsidy model allows U.S. cellular customers to obtain a ~$700 smartphone for an initial cost of ~$200. Though the cost of the phone is recovered later in the contract, it offers a powerful incentive for a U.S. costumer to purchase a phone on contract with the biggest possible subsidy. For a majority of the past six years, the phone with the largest subsidy has been the iPhone (and other premium smartphones). Unfortunately for Apple, and for other high end smartphone manufacturers, this era of stable subsidies and friendly competition is drawing to a close.

Bring your own phone



At first blush, a new plan unveiled by AT&T on February 1st is simply a reaction to T-Mobile in order to ensure that AT&T's family plan customers remain with AT&T. This new pricing plan is somewhat predictable -- family plan customers are incredibly lucrative for the company, and its reluctance to part ways with a huge chuck of revenue is understandable.

However, there is one part of the new pricing structure that indicates a slightly different motive:

"Significantly, this new pricing scheme only gives a discount to customers who either pay for their phone outright ("no-commitment pricing" in AT&T parlance), bring their own unlocked device (say, a Nexus 5), or use the carrier's Next early upgrade plan. If you want to buy a phone on-contract, you'll still need to pay $40 per line to add a phone to your Mobile Share plan. Tablets, hotspots, and feature phones will continue to cost anywhere from $10 to $20 per month to join a Mobile Share plan."


If you want to buy a phone on-contract, you'll still need to pay $40 per line to add a phone to your Mobile share plan

This one line has severe implications on the current smartphone landscape. The new mobile share pricing will save a lot of customers a significant amount of money -- IF they decide to use unsubsidized devices. For an average customer to keep the savings this plan offers, they would have to either (1) pay the full price of an iPhone ($700) OR (2) sign up for AT&T's NEXT plan.

The NEXT plan is basically a payment plan with window dressing and clever marketing, designed to allow AT&T to recover the full cost of the unsubsidized device over a year or two. Significantly, NEXT offers AT&T all the benefits of a contract locked customer, without the downside of having to subsidize the customers device. Although not as onerous to the customer as a contract, the NEXT plan requires that the customer reimburse the carrier for amounts outstanding on a smartphone before the customer is allowed to switch carriers. Genius for AT&T, rather unfortunate for the end user.

The savings of the new plan are huge. But the implications on high end smartphone makers are even bigger. Apple, in its glory days, helped design a subsidy system that allowed customers to get a premium device in their hands without forking over a ton of money. In the new, competitive landscape, this will prove to be a double edged sword. Customers are now conditioned to expect to be able to get a iPhone quality device for an upfront cost of $200. Hence, the perceived value of the device to most customers is ~$200. However, if a customer wants to retain the savings offered by this new plan, that shiny iPhone will require an upfront cost of $700! The sticker shock is insane, and may drive budget conscious customers to lower priced handsets like the Moto G or Nokia 520. The counter to this argument is that consumers will simply choose the NEXT pricing over a high upfront cost, and life will go on as normal. This could not be further from the truth.

Transparent Cost

For Apple, the advantage of the subsidized price model is that the real cost of the iPhone is hidden in a byzantine pricing structure. This structure tends to favor higher cost, higher subsidy phones, at the expense of lower margin, lower cost competitors. With AT&T NEXT, the subsidy disappears. The phone is no longer subsidized -- it is financed. This means that a lower cost phone will cost less per month than a higher cost phone. Not only that, but the cost will be clearly itemized on your monthly bill. This transparent cost of the iPhone will leave many questioning it's value. Although the perceived value of any smartphone is not greater than ~$200, a monthly charge will now show up on the bill at around $30 if you finance an iPhone through AT&T NEXT. If you were to buy an older phone, that finance charge may drop to $15. Better yet, if you were to buy a phone that cost $200 up front, there would be no finance charge. This line of rational, cost-saving thought, may prove to be incredibly dangerous to the iPhone (and other high-end phones). It will lead customers to start questioning the value of high-end phones more than ever before. The economics of the smartphone decision have never been so clearly laid bare. With money on the table, will customers choose luxury? Or will they tend towards "good enough?"

February 1st, 2014. The end of an age.