Author(s): Raghu Gopal
In 2013, T-Mobile US sparked its "Uncarrier" reputation by launching what it branded the Simple Choice plan. It offered a contract-free, post-paid plan that included unlimited calls and texts along with 500 MB of data — a reasonable amount at the time —for $50 per month. T-Mobile was going against the norm by no longer providing subsidized phones and instead offering interest-free, 24-month financing on the full cost of a device.
Although this seemed like a subtle change to the existing post-paid model, it helped create a new paradigm for consumers to buy mobile services. Separating the device from the airtime plan is becoming increasingly common in many countries, including those outside the US. This poses additional challenges to smartphone makers already struggling to bring innovation to a lacklustre market.
Carriers had been supporting an environment in which subscribers could get smartphones at artificially low prices in exchange for a two-year commitment. The actual cost of a smartphone was baked into the monthly service charges rather than separated. After 24 months, customers would come into carrier stores to buy another subsidized smartphone. It was a great model for hardware makers like Apple and Samsung, as they could count on post-paid subscribers upgrading their phones every two years.
With its 24-month payment plans, T-Mobile educated its customers to the fact that smartphones were worth a lot more than $200, a price that most subscribers were used to paying for their devices. Subscribers have learnt that they can save money after two years as the smartphone is fully paid off.
When rivals AT&T and Verizon began to follow T-Mobile's lead by shifting its customers away from device subsidies to 24-month payment plans, it was clear that this would have an effect on demand for smartphones. We note that Sprint leases phones instead of selling them. Now, post-paid subscribers are holding onto their devices for 36 months, 50 percent longer than before.
In October 2018, T-Mobile made another move that others are bound to copy and which will hurt demand for smartphones. It began offering 36-month instalment plans on most flagship smartphones, making it easier for consumers to get a top-of-the-line device.
T-Mobile's move came as CCS Insight's own consumer research revealed the likelihood that phone replacement cycles will lengthen even further. Over a third of respondents in France and the UK expect to keep their existing phone for longer than their previous one. This was much higher than the number anticipating they'd own it for a shorter period of time. Meanwhile, about 30 percent of UK customers told us they're on a SIM-only plan, split roughly evenly between 30-day rolling contracts and 12-month deals. For more information about our research into customers' changing journey to buy mobile phones and subscriptions, or to receive a free report exploring some of the leading findings of our research, see Cracking the Code.
The lack of significant innovation in smartphones, rising prices and longer payment plans are causing consumers to rethink the way they buy handsets. A new, more pragmatic pattern is forming among subscribers that doesn't bode well for device manufacturers.