The Next Battle in the Smartphone Wars: Phone Subsidies

The Next Battle in the Smartphone Wars: Phone Subsidies

While there has always been healthy competition between the major wireless carriers, to date, the heart of the smartphone wars has been between devices. In March, T-Mobile became the first to take a meaningful step away from phone subsidies, setting in motion what is becoming the next major battle for your smartphone consumption dollars. With AT&T and Verizon's recent announcements of their own "early upgrade" plans, the conflict is intensifying.

There are two central questions which this transition raises, namely, the need to understand what is really happening and who will benefit. Without digging into what these changes really mean, it is difficult to trace the impacts. Ultimately, it is the impacts of these changes that will affect us as both consumers and investors.

Spin versus reality
T-Mobile, AT&T, and Verizon are marketing their new plans as a way for consumers to upgrade their hardware more frequently. In the case of T-Mobile's JUMP! plan, customers are able to upgrade as often as twice a year, but they are required to pay for the new device on an installment plan, as well as pay a $10-per-month plan fee -- but the plan fee includes insurance on the device. AT&T Next only allows you to upgrade once each year, requires no upfront down payment, and has no additional charge for the upgrade option. Verizon Edge is a blend of the two, allowing upgrades twice per year, requiring no fee for Edge, but requiring that you pay off half of the device before turning it in for your upgrade. ZDNet's Mathew Miller does a side-by-side comparison that does a nice job of walking you through a concrete example.

The clear conclusion for consumers is that, while these new plans allow you to upgrade more frequently, they are significantly more expensive than traditional options. This is no surprise to anyone paying close attention to the reality of what these plans represent: the end of phone subsidies by carriers. Where the added cost gets really out of control is if you choose not to upgrade as quickly as possible. Each of these plans contains an installment-payment feature, meaning that choosing not to upgrade forces you to keep paying toward your existing device.

In the case of Verizon Edge, this might make sense until you have reached 50% of the device's price -- if not, a lump sum payment is due at the time of upgrade to reach the 50% level. For the others, however, you continue to pay for a device you could replace. In the case of AT&T Next, which only permits an upgrade once per year, by the time you upgrade, you have already paid for more than half of the cost of the device, based on the example of having the device fully paid in 20 months.

For both of these carriers, there is no price break on monthly service fees, and some industry experts believe these rate plans already contain fees to offset the cost of phones. It is this last reality that led T-Mobile's Chief Marketing Officer Mike Sievert to suggest that, under AT&T's plan, customers pay for the same device twice.

Perhaps an obvious push back against the "waiting to upgrade" argument is to ask why anyone would. Maybe the most obvious group is Apple iPhone users. Given the fact that Apple continues to keep its flagship device on an annual product cycle, if you are an iPhone user, there is no reason to upgrade more frequently than once a year. In the short term, Apple could actually benefit from the rollout of these plans, as customers might opt for an iPhone 5 today, knowing they can upgrade to an iPhone 5S in six months on T-Mobile or Verizon; but once you get on the annual cycle, there will be little reason to buy a new iPhone more than once per year.

And the winner is...
While each of the plans have different benefits and drawbacks, the wireless industry as a whole is the winner. The easiest way to achieve growth in an industry is to get customers to pay more for what they are already buying. Particularly in the U.S., we have all become so reliant on our smartphones, that it's unlikely consumers will fail to accept the ultimate end of subsidies. The industry is very astutely focusing attention on upgrading more quickly to counteract the natural inclination to upgrade more slowly if the cost of devices is rising. It will likely take several quarters to truly gage the impact of this shift, but expect to see a benefit to the carriers that should be reflected in their respective stocks.

As the carriers get into the mix, the smartphone wars are intensifying and expanding. Truth be told, one company sits at the crossroads of smartphone technology as we know it. It's not your typical household name, either. In fact, you've probably never even heard of it! But it stands to reap massive profits NO MATTER WHO ultimately wins the smartphone war. To find out what it is, click here to access the "One Stock You Must Buy Before the iPhone-Android War Escalates Any Further."

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