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New Smartphone Upgrade Plans Can Be Costly In The Long Run

Filed by KOSU News in Business.
July 19, 2013

Three of the four major wireless companies are out with new plans for those who want the latest smartphone sooner. The plans, with names like Verizon Edge and AT&T Next, essentially let you rent a phone for six months or a year and then trade it in for a new one — but there’s a catch.

“You’re paying essentially twice,” says Avi Greengart, who is research director for consumer devices at Current Analysis, and does some consulting for the industry.

T-Mobile started this craze with its Jump plan that tacks on a monthly fee for the privilege of upgrading early. But T-Mobile, the underdog, charges less for service. That’s not the case with Verizon and AT&T.

“You’re also subscribing to a rate plan that historically had a subsidy built in,” Greengart says.

A big-name smartphone like the Apple iPhone or Samsung Galaxy costs about $650. Most of us never pay that much upfront. Instead, we plop down $200 for the phone and sign a two-year contract. Baked into our monthly fees is about $20 a month that, over the life of the contract, recoups the full cost of the phone.

But in the new Verizon and AT&T plans, you’re paying that $20, and you’re paying the full cost of the phone in monthly installments. That’s why in many cases, the carrier comes out ahead.

“It certainly looks like AT&T has developed its plan in such a way that it doesn’t lose any money,” Greengart says.

It’s a similar story with Verizon, but when asked, spokesmen for both companies gave similar answers about these new plans increasing customer “choice.” The old-style two-year contract plans are not going away. Asked about paying toward both monthly payments based on the full price of the phone and that $20 baked-in fee, neither company would go into details about the companies’ pricing.

“Many things go into the way we price our services,” AT&T spokesman Mark Siegel says.

Similarly, Verizon spokesman David Samberg says, “What you’re paying for the monthly price plan, there’s a lot to that.”

Both then went on to talk about how great their networks are. It is expensive for carriers to upgrade cell towers for new technology every few years.

And, the market is maturing. ComScore data show 59 percent of Americans now have smartphones, up from just 8 percent just 5 years ago. That growth inevitably will slow as the market saturates.

Horace Dediu, an independent analyst at Asymco, says these new plans are a way to try to preserve profits and the status quo as long as possible.

“That means often adding complexity, adding some illusion,” Dediu says.

He doesn’t fault the carriers, though. For one thing, customers have shown time and again that they would rather pay less upfront and more over time.

“When you give a simple, but initially expensive option, people tend to not take it,” he says.

And, that option actually exists. Today, you could pay the full price for a phone, and then sign up for a no-contract prepaid plan and save hundreds of dollars over two years. [Copyright 2013 NPR]

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