The End of Subsidies in the US Wireless Market

Almost a year ago, I wrote about the then-nascent move by the US wireless carriers away from smartphone subsidies. T-Mobile was the pioneer in ending subsidies and the other carriers took a while to get on board – especially Verizon – but we’re now quite a bit further along. I thought I’d share some numbers and some more thoughts about these trends.

Significant progress in getting the postpaid base off subsidies

The chart below shows the progress the major US carriers are making in getting their postpaid subscriber base off the subsidy model, with T-Mobile leading the way:

Carriers base off subsidy

As you can see, T-Mobile’s base is largely off the model and it should be done with the transition by the end of this year. AT&T has made rapid progress over the past year too, with over 50% of its base now off subsidies. Verizon was the slowest to get started and the most reluctant to move off the subsidy model, but even their numbers are starting to pick up. Sprint doesn’t report this number directly, but 46% of device sales in Q4 were on the non-subsidy model, so it is very much moving in the same direction.

So far, installment billing is helping, not hurting, sales

One of the big questions about the end of subsidies (and the accompanying move to installment billing for devices) was whether it would hurt or help smartphone sales. Well, Q4 2014 was easily the largest quarter for smartphone sales in the history of the US wireless market, which may help to answer that question. Three factors played into this:

  • all the carriers aggressively driving switching behavior
  • new iPhones launching late in Q3 and driving many sales in Q4
  • the move to installment billing

The result was dramatic (and we don’t even have T-Mobile’s results yet):

Smartphones soldThe four carriers who have reported so far had 30.1 million smartphone sales between them and T-Mobile may well have had another 8-10 million too. The move to installment billing certainly doesn’t seem to be hurting device sales so far.

A change in carrier finances

The shift away from subsidies and towards installment billing is also having a significant effect on carrier finances. One of the traditional carrier metrics – average revenue per user, or ARPU – has gone into rapid decline at most of these carriers, as they adjust their service pricing to account for the end of subsidies. But, at the same time, they’re billing an increasing proportion of customers every month for device payments which is pushing their total receipts from customers back up. Three of the four carriers have adopted a new metric – average billings per user (ABPU), which also accounts for installment payments, as shown in the chart below:ARPU and ABPU

The chart is a little busy, but hopefully you can see that, in every case, the ABPU figure is above the traditional ARPU figure and, for the most part, these numbers are increasing even as ARPU is falling. The one exception is Sprint, which is seeing an ever higher percentage of its total device base shift to tablets, which have a much lower spend level associated with them than phones and that’s dragging down overall ARPU.

The other major financial impact of this shift is the positive impact on margins in the longer-term. That’s much harder to tease out, so I won’t show it here, but all the carriers are also seeing an improvement in margins as a result of the decline in subsidies. That’s a good thing too, because their underlying margins have come under pressure from the increasingly aggressive competition in the market, which is pushing prices down even beyond the adjustment for removing subsidies.

A win/win – so far

At least so far, it looks like the end of subsidies is working out well for operators, device vendors, and consumers. Device sales are actually up, despite some worries they might decline, and consumers now get greater transparency over the true costs of both devices and services and greater freedom to switch between carriers. The only potential downside is the same risk I talked about in that earlier piece: once consumers get used to the idea of paying for devices this way, certain device vendors might decide to cut out the middleman entirely. I talked about Samsung and Apple as two of the most obvious vendors to do this, but of course we’ve been hearing rumors lately about Google launching some sort of mobile virtual network operator (MVNO), which could be particularly interesting if paired with Nexus device sales on installment plans. We’ve seen an iPhone for Life plan and other leasing options from Sprint, and all this leads me to believe that – if they wanted to – Apple or other vendors could still come in and take over the primary customer relationship, which might well have negative implications for the carriers over the long run.

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Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

48 thoughts on “The End of Subsidies in the US Wireless Market”

  1. Cut out the middleman. It would be a beautiful comeuppance for such a shameless industry. Couldn’t happen to a nicer bunch of guys. Of course if Apple created an MVNO and took a large share of its US customers back that could spell disaster for most carriers whose most affluent customers are on iPhone. Then Apple could buy a network for cheap.

    1. Yes, we’re still too early in this trend to have seen the impact of the resale value, but that’s going to be a big money-spinner for the carriers too over the next year or so.

      1. Absolutely. They’re going to have to offer more for buybacks – currently a huge profit center.

        It absolutely boggles my mind why carriers (utilities) would move to decouple device from service – and increase competition.

        1. Many of the devices bought under the early-upgrade plans have to be given back when you upgrade, so they’re getting those back for free, despite the fact that much of the cost has been paid.

          1. I would assume there’s some amount of value in those old devices, especially the second hand market for iPhones. Android devices, probably not so much.

  2. Fascinating. I totally overlooked the US consumer’s ability and willingness to finance anything. France’s move to unsubsidized really hurt the high end: we don’t routinely finance small purchases, and our credit cards are what the US call debit cards. US consumers are just substituting one rent for another, net effect is zero.

    1. Other people (including me) did try to tell you that carriers could simply move to installments/financing. You wouldn’t listen. You’ve been banging the ‘end of subsidies means doom for Apple’ drum for a long, long time. Let it go. I’m fairly sure I just read a report that said Apple’s share in France has gone up, so by hurting the high end you must mean flagship Android phones, since you also continually argue that the iPhone is not a high end device.

      1. I buy my phones outright. Having a monthly installment is having an additional monthly payment. The carriers used to rip us off by continuing the higher charge even after the phone was paid in full, thus forcing an upgrade to avoid paying for nothing. Beyond this very important change, stopping a blatant theft, does it matter to the consumer whether it’s called a subsidy or an installment?

        1. It does not matter to the consumer. I also buy most devices outright. I always do the math first of course, it’s foolish to assume the outright purchase is always the best deal. It usually is, but not always. Anyway, it’s time to end the very silly notion that iPhone sales are doomed as subsidies disappear.

          1. I can only speak for myself, but I never said that. Could it happen? Perhaps. Frankly, I don’t care in any positive way on how Samsung’s, Apple’s, Google’s, MS’s, etc. sales are. If they make money, good for them. If I feel they are ripping me off, then I’ll speak my mind.

          2. My original comment was directed at Obart, who has made that silly subsidy argument for the longest time. Could it happen? Doesn’t seem likely if we believe things like actual data and reality. People who can afford iPhones buy them, and it turns out that a lot of people buy iPhones. Obart has long been on the ‘Apple is doomed any moment now just wait you’ll see’ train.

          3. I don’t need to defend Obart, they do just fine by themselves. Answer me this… why is it the only people from whom I see the word “doom” are Apple fans. Could it be that there’s some obscure reference elsewhere in the past? Sure. But it keeps coming up and doesn’t go away, and it’s Apple fans shouting it.

          4. Come now, don’t pretend you’re not aware of the great amount of analysis that predicts Apple’s failure. The doom meme is a joke among those of us that actually apply reason and logic to our analysis of Apple. devotes a good deal of excellent analysis to this very topic, trying to figure out why Apple is perpetually seen as being in trouble. As Horace writes recently “Regardless of extreme growth, pricing power, headroom and, most importantly, customer loyalty, the company’s prospects are seen as dismal…”

            As if on cue, Forbes has an article with the headline “6 Reasons Apple Is Still More Doomed Than You Think”. This kind of nonsense is rampant in the tech and business media. We make fun of it, yes, but it is pundits and analysts (and trolls like Obart) who don’t understand Apple that are shouting doom.

          5. My only knowledge of analysis of predicting Apple’s failure comes from whatever is reported by Apple fans. I don’t read financial information. It bores the daylights out of me. None, not even my bank statements, except under duress. Fortunately for me, my wife does that.

            So, if you’re a financial stakeholder (you may well be) in some for, then I could almost understand taking offense of such news. If one is not, I find it to be absurd.

          6. I am offended by the absence of critical thought, reason, logic, proper analysis, facts. This is not a problem just when it comes to Apple of course, the media is chock full of poor analysis, but it does seem to reach new levels of dumb when it involves Apple.

            I do own Apple stock as well, bought in 2008, so far made more than seven times the initial investment.

          7. “I am offended by the absence of critical thought, reason, logic, proper analysis, facts.”

            I can agree and sympathize with that. With me it’s the Kardashians.

          8. The argument was not so much silly as in need of a “financing” caveat, something you still don’t seem to have understood. Countries where consumers don’t routinely finance small purchases do show a drop at the high end when subsidies diminish.

          9. “The argument was not so much silly as in need of a “financing” caveat, something you still don’t seem to have understood.”

            Interesting. I guess when I (and others) told you financing was the simple solution, we didn’t understand this financing caveat you speak of?

            “Countries where consumers don’t routinely finance small purchases do show a drop at the high end when subsidies diminish.”

            In your original comment you say France is an example of this, and yet I just read an article that mentioned iPhone’s share has *increased* in France. But I suppose there must be a lot of countries where diminished subsidies are hurting iPhone sales, what with how terrible iPhone sales are lately.

          10. you need to work on your sense of time. Subsidies haven’t “just” disapearred in France, so what you”just read” isn’t mostly about subsidies. Are you aware Apple at last released a phone designed for our eyes ?

          11. and marketshare figures, but don’t bother ^^
            do you even know when france started no-subsidies contracts ?

          12. Marketshare for the high end segment? All recent data shows the iPhone increasing the share of that segment, dominating in fact. Oh well, I’m sure the iPhone will fail miserably, *any day now*, because, you know, subsidies… and… stuff.

          13. You’ve lost the plot. Marketshare for the global market of course. No subsidies (and no financing culture, then) = bad for expensive phones. Not too hard to grok, methinks.

          14. Global share of the entire market? That makes no sense. The iPhone doesn’t operate in the entire market, only the higher end segment, where it dominates. So you’re saying, somewhere in the world, very soon now, as subsidies end, or have ended, or will end, AND that country doesn’t finance anything, sales of more expensive phones will decrease. Except the iPhone continues to sell very well. Did you have a point to make?

          15. The point has made itself, but you’d need to look at iPhone’s share in France to understand that.
            Conversing with you is a major bore. I’ll ignore you and I’d appreciate if you did the same.

          16. Ah, so the iPhone is failing in France, or was failing, or will soon fail, except for that report I just read about the iPhone’s share in France increasing, so it must be that the iPhone will soon fail in France, *any day now*. Or was it that the iPhone was failing in France and now it’s not, but it will again, *real soon now*, because… um… financing culture!

          17. Just so you’re aware, you guys talking about buying phones outright are in a very small minority. It’s interesting behavior, but it’s far from the norm. AT&T had less than a million people bring their own device last quarter vs. over 10 million total smartphones sold at AT&T.

          18. Agreed. And I might not be buying outright next time around, the carrier deals are very good right now where I am.

          19. I have a family of five with six lines (two are mine). Of course, I have us on a family share plan. I didn’t always buy outright, especially for the kids, but we are almost there across the board.

            Reasons I do so:
            a) It costs the same for the phone.
            b) The plan costs less.
            c) I can leave at will without commitment (sort of, coverage impacts choice)
            d) I can demand (and get) my phone unlocked.

            I get a new phone (or two) every year. I give the previous year’s away or keep a spare just in case.

          20. No question. Which is why we still have some on a Next plan. Still, you ARE paying full sticker price. Oh, and options do cost money.

          21. That’s a very local thing. Again, in France, very few customers finance their phones, so phones are mostly either subsidized or paid for up-front.

        2. when it was a subsidy, the customer paid some portion of the cost up front, which for a high-end device was several hundred dollars. They often mistakenly thought that this was the price of the device, which wasn’t anti-consumer per se, but meant they had a poor understanding of the true cost of the device, which would come back to bite them if they lost or broke the device and had to pay full price to replace it. Now, the customer explicitly knows the cost of the device, pays very little up front and a predictable amount each month, with the service and device cost clearly separated on the bill and in the customer’s mind. And yes, when the device is paid for, they pay less or can upgrade and start the process all over again.

  3. Once we hit stable state, will customers continue to upgrade every two or so years as they did with the subsidy model? Remains to be seen…

    1. Why wouldn’t they continue to upgrade? The end of subsidies simply means a new kind of subscription/payment model, that was always obvious. Consumers will pay a monthly fee for the device + plan (which probably includes some protection against theft or damage) and they’ll upgrade as eligible.

        1. I doubt it. I’d be surprised to see any change in the frequency of iPhone upgrades, one way or the other. Customers have a habit of paying X per month to get Y. That isn’t changing so why would consumer behaviour change?

      1. Because the device fee is no longer obscured within your voice/data plan and when you have to pay for the device separately, even as a monthly fee, the propensity to upgrade frequently is directly related to how quickly the product becomes obsolete to the point of un-usable and disposable income. Sure, the most financially able customers and early adopters will. Just not sure that the broader segments of customers will upgrade at the same frequency.

        1. I’m not sure consumers are as aware as you think. They pay X per month and get Y. That isn’t going to change. You’re assuming they’ll now look at their bill, realize what the device portion is, and change their behaviour. I doubt that very much.

          1. US market share for iphone vs Android was in balance for most of 2013 and 2014, with iphone and android trading lead, but now Android is firmly in lead and pulling away thanks to end of carrier subsidy. Kantar reports 65% us market share for Android as of end of May 2015.

          2. Well, from an article quoting that Kantar source: “In the three-month period ending in May 2015, Apple’s iOS claimed a 30.9 percent share of the U.S. smartphone operating system market, down from 32.5 percent in the same period last year. By comparison, Google’s Android increased its share of the U.S. market from 61.9 percent to 64.9 percent over the same period.”

            So it isn’t the huge swing you’re making it out to be. Using your source it would seem the end of carrier subsidies had almost no impact. Which is what I predicted.

            Other sources have different numbers of course, but I haven’t seen any data that shows a huge change.

            Also, direct from that Kantar source: “However, Android is not showing much improvement in the Europe “big five,” where it dropped 2.9 percentage points, compared to the same period in 2014. Europe’s big five markets are Great Britain, Germany, France, Italy, and Spain.”

            Didn’t Europe generally end carrier subsidies before the US?

          3. Hmm, also interesting, a tweet today from Horace Dediu.

            “Android market share in US phone market unchanged for ~3 years: 52.2% Jul 2012 to 52.1% May 2015 iOS: 33.4% to 43.5% same time.”

            Horace has a very good track record. Of course he may be tracking the phone market while you’re looking at the smartphone market. Then there’s also segmentation, which clearly shows the iPhone increasing its dominance of the premium segment. I just don’t see much to support the notion that the end of carrier subsidies is hurting the iPhone.

  4. I’m sure that there are many payment schemes around the world, but just to add some perspective, I think Japan’s system is quite similar to this instalment billing scheme.

    One thing that Japanese carriers do, that I don’t think the US carriers are doing, is that until the customer has finished paying for the device, carriers give the customers a substantial discount. They stop giving the discount once the device has been fully payed for (typically 24-months). This creates an incentive to always be on an instalment billing plan, which means you should upgrade at least every 2-years.

    The discount is substantial, and is often up to the price of the newest iPhone with the smallest storage option, which means that you can basically get that device for free.

    1. Interesting – it’s sort of the opposite here. As long as you’re paying for the phone, you have essentially two bills: service and equipment payments. Once you’ve paid off the device, your bill goes down, assuming you don’t jump straight into another device. What we don’t know is how many people will simply go straight into a new phone when they pay off the old one – too soon to tell.

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