AH Tech Talk: Why Carriers Are Switching to Selling Phones Off-Contract

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T-mobile might’ve just sparked a revolution in the US with its “un-carrier” strategy – a revolution for how carriers are going to sell the devices on their network in the future. Instead of continuing to sell devices on contract, and subsidize a good chunk of the price, carriers may be looking to sell them off-contract, perhaps with a payment plan like T-mobile has, but which is separated from the carrier’s Voice/Data plans.

Phones like the Moto G, will also make it very cheap for consumers to buy good enough smartphones at $100-$200 prices off-contract, and with no monthly payment other than the Voice/Data plans. If you don’t need a plan, you could even buy a prepaid SIM, and get the flexibility of switching carriers more easily, without continuing to pay the previous one, because you’re stuck in a contract (and without paying any ETFs either).

But why would the carriers themselves agree to sell their phones this way in the first place? It seems that lately carriers have become increasingly more hostile towards smartphone subsidies, and one of the main companies who is presumably responsible for this is Apple, who’s asking carriers to buy a certain (big) number of iPhones upfront, in order to increase its own revenues that quarter. Apple must be asking for carriers to buy more and more iPhones from them, in order to break their previous records, and make investors happy.

This has led to carriers then having to offer more shelf space for the iPhones, and to advertise them more, in order to be able to get rid of them, and make their money back. That means the other OEMs have been squeezed out. We also know Apple charges carriers the full price for the iPhone, which means carriers have to subsidize more of it, in order to reach that $200 price-point. On the other hand, carriers have to force other OEMs to sell them their phones at discounted prices, so they don’t have to subsidize as much, and compensate for what Apple is asking of them.

Carriers may not be hurt as much by this as the other OEMs are, but I get the feeling they are starting to not like this method too much either, so they may be pushing everyone to sell their phones off-contract, either for the full price, or through the carriers own payment plans. The problem for Apple in such a case, is that Americans would finally realize the true price of the iPhone, when they are asked to pay much more than for other phones.

In the current situation, the carrier may pay $650 for an iPhone 5S and $450 for a Galaxy S4, but the user is still paying $200 for both of them, on contract, so from his or her point of view there’s no difference in price. But if they had to pay $35 a month for the iPhone compared to $25 a month for the Galaxy S4 (for a 2 year period), then they’ll notice the difference.

So basically, if all the carriers copied T-mobile’s strategy, it would be better for everyone involved, from consumers, to carriers, and to most OEM’s, with the exception of Apple, who’s already been abusing their negotiation power with the carriers, that led to other OEMs being squeezed out of money or from the market (HTC comes to mind).