Friday, April 5, 2013

Who are the winners and losers when carriers kick the contract habit?

T-mobile recently announced that they would drop the prevailing practice of signing up customers for two year contracts and instead let all customers go month-to-month. This, combined with a decision to stop subsidizing handsets is a first among the major US carriers.

Let us take a look at who stands to gain from a change like this.

First of all, an obvious winner is the consumer. While the change can seem minor when you look at the total cost spent per month, at least if you include a handset payment plan, the no-contract setup provides the consumer with unprecedented flexibility as well as a more precise break-down of actual costs. This makes it easier for the consumer to find the optimal level of spending on the device and the plan.

The second party that has a lot to gain from making this move is the carrier. Although carriers historically have made lots of money on the two year contract and subsidized handsets model there are a lot of upsides with going no-contract. 

Obviously they no longer have to commit capital to the front loaded cost of subsidizing handsets, but more importantly they can now re-focus the conversation with the consumer back to the value-add they bring to the table, the plan. Instead of having the conversation, "I want an iPhone, which carrier should I chose?" They can now try and change the conversation to "This is our month-to-month plan, it includes x amount of minutes and data and here is our network coverage. If you don't like it you can leave any time. And, by the way, you can have any phone you want.". This is why even Verizon won't rule out going no-contract in the future.

While Apple and Samsung are doing great, they are somewhat vulnerable to a move like this. They can no longer take for granted that people will update their handset every two years. Maybe the consumer is happy to have his or her iPhone for another year or two instead of upgrading like clockwork. It can of course go the other way too, that the consumer decides that he or she wants to update his or her handset every six months but I think that might be the exception. In any case, the handset manufacturers will have to motivate the consumer to upgrade, it is no longer automatically done by the carrier when the contract is up.

1 comment:

  1. For the first time ever it feels like, I bought handset and contract separately. O2 in UK own a company called Giff Gaff who have monthly plans, I'm on the £10 plan, which is renewed every month with your payment, I have also transferred my old number. On top of this, you have a top up account which takes care of anything outside of your allowance, such as internet outside of my 1GB or international calls and texts. This allowed myself to get exactly the phone I wanted (as cheaply as the best contract offers, but with a more generous contract and no unlocking or unbranding needed! This for me was the HTC one XL which wasn't even available in UK, so I got it on eBay from Singapore or some place like that...

    That the days of upgrading every two years or less may be over will be painfully evident to Apple unless there is a wow feature as often as there used to be. But a wow feature is easier when technology is young and less likely to occur as the law of diminishing returns set in and we are getting used to the wizardry.
    Joining their party late from my HTC experience, I am puzzled about all the fuss! I have tested my first iPhone over the last few months, and there are just two things it has over my HTC: that gorgeous, snappy camera, and availability to read company mail. The second is obviously not down to the phone, but all about it being issued by my company to me, but for anything else, I switch back to my real phone where all kinds of manipulation, customizing, text-entry and interface navigation is so much less cumbersome and logical, not to speak of the large lovely screen. The fact is that the latest generation of the iPhone only has its aesthetics and loyal following to thank for its success, and I just cannot imagine how a 5s could be anything but a flop given that it per definition should only have incremental changes(biggest difference of 5 to 4s was the screen and processor, but even this was not enough for many who now are hoping for the 6 instead...