A trend shift from subsidy to installment plans is visible
In the previous part of this series, we discussed some of the trend shifts that have been happening in the U.S. telecom industry. One of the recent and important trends that we’ve seen is the shift from device subsidy plans to installment plans. In the traditional subsidy plan, a customer enters into a two-year contract with the telecom provider. The provider offers customers a smartphone at a highly subsidized price with a monthly subscription for two years.
For example, you can pre-order an Apple (AAPL) iPhone 6 starting September 12 for a starting price of $199 with a two-year contract with Verizon (VZ), AT&T (T), or Sprint (S). You can also pre-order the iPhone 6 from T-Mobile (TMUS) contract-free for $649.
On the other hand, installment plans are the plans for customers who want to upgrade their devices faster or who don’t want to pay the up-front cost of their devices. For example, under the AT&T Next installment plan, users can pay for their smartphones in equal monthly installments and also have the flexibility to trade in or upgrade to a new smartphone. Compared to the traditional subsidy model, the Next program provides more flexibility to customers who like to frequently upgrade their devices.
AT&T’s Next program has gained popularity
Due to these advantages to the customer, the Next program has gained popularity while the traditional subsidy model is seeing declining adoption. As the chart above shows, the adoption rate of AT&T traditional subsidy model has declined from 75% in 1Q14 to 56% in 2Q14. AT&T expects the popularity of the Next program to continue to rise.