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Summary:

These new smartphone upgrade plans from carriers sound great, but why are they introducing them now when the amount of people in the U.S. upgrading phones is actually declining?

T-Mobile media event

All of a sudden, two of the top four U.S. carriers have a new smartphone upgrade plan with another one expected to join suit. Does the wireless industry really feel bad for those who want to trade up but can’t or is something else in the works? The new early upgrade plans may seem altruistic on the surface but they’re not all good deals. And they coincide with an interesting data point: Smartphone upgrade figures are down, down, down.

Smartphone upgrade trendsOn Wednesday, the Wall Street Journal shared data from UBS that shows the trend. In 2008, the number of consumers who upgraded their phones was 20 percent more compared to 2007. Last year that figure was near negative 10 percent — there were fewer upgrades than in 2011 —  and this year, UBS expects more of the same with 1.9 percent fewer upgrades than in 2012.

Simply put: Fewer people are upgrading because the changes in yearly smartphone models are more incremental than ever and because most consumers are locked into two-year contracts with their current devices. For some, it just makes no sense to invest more money in a new phone when the current one works fine and can still run all of the latest and greatest apps.

The carriers don’t have much to do with the first point, but they have everything to do with the second. That’s why last week, T-Mobile launched its Jump program, allowing customers to pay $10 per month for insurance and the privilege of upgrading their handset with no additional fees. AT&T followed suit this week with its Next program and Verizon is widely expected to unveil a similar plan.

Why would carriers care if consumers don’t upgrade their smartphones as often? I can think of at least two reasons: One financial and one technological.

Carriers don’t really make much money on handset sales: The goal is to get you to buy a phone and make money on services so carriers pay for a large portion of a handset and make the money back up in plan fees. The subsidized cost of the handset is built into the plans; roughly $20 per month although the exact figure could vary. In AT&T’s case, the new upgrade plan adds income through the Next program while also still including that subsidy payment in the monthly service plans. In essence, the company is adding a new revenue stream without removing an old one.

att-lte-galaxy-s-iiiAlso important, however, is the billions of dollars carriers are spending on network infrastructure upgrades. The new networks provide LTE service, but if customers don’t upgrade to LTE phones, the carriers lose some benefits of their costly new networks provide. Using LTE, the carriers can reduce their cost to deliver data — again, making more money — if the handsets on the network support it.

Granted: Most new smartphones these days do support the faster, more efficient LTE networks. But for someone who bought a smartphone 6 month or a year ago, that may not be the case. By adding an upgrade incentive, the carriers appear to be looking out for consumers. The reality is: They want as many people as possible on LTE and with super powerful smartphones that can handle future services.

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  1. So does it cost the carriers less to deliver on LTE due to the technology or due to some hidden loophole/subsidies from the government?
    I would have thought it costed them more to deliver on LTE due to the higher speeds it offers.

  2. “The new networks provide LTE service, but if customers don’t upgrade to LTE phones, the carriers lose some benefits of their costly new networks provide. Using LTE, the carriers can reduce their cost to deliver data — again, making more money — if the handsets on the network support it.”

    At roughly $6/GB compared to $10/GB seen two years ago, U.S. carriers have dropped their prices on LTE service somewhat. But it’s still a far cry to the $2/GB many European and Asian carriers have been charging during that time.

    I’d love to migrate to Verizon’s 50GB LTE plan and dump my home DSL for a MiFi, but at $335/month, I’d need to donate a few internal organs before I can afford it. Carriers need to lower the plan pricing EVEN MORE to get aggressively competitive. I’m tired of this constant repackaging under new names, claiming to offer more, yet seeing my wallet get raped the same for basically no difference in service.

  3. They aren’t just adding a new revenue stream without losing an old one, they are preserving an old one, or at least trying to preserve it. Consumers are beginning to realize that contracts and subsidies are a bad deal, and this will only accelerate once a greater number of quality phones like the Nexus 4 are made available at reasonable price points. They are hoping to entice their customers to continue over-paying for their phones with the promise of quicker upgrades. Without this move, and maybe even with it, it’s only a matter of time until off-contract purchases become the norm and they lose that revenue stream.

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