Are Smartphone Hardware Subscriptions the ‘Next Big Thing’?

New service lets users upgrade without pricey fees

   
Are Smartphone Hardware Subscriptions the ‘Next Big Thing’?

Things continue to heat up in the world of mobile.

Amid slowing flagship smartphone sales and a market that’s becoming increasingly saturated, wireless carriers have been experimenting with different plans designed to lure customers from each other.

In the spring, the big thing was contract-free options. Now the carriers are trying something else: They’re offering customers the option of paying more each month and being able to upgrade their mobile device more frequently, without paying upfront costs or early termination penalties. AT&T (T) launched “AT&T Next,” T-Mobile U.S. (TMUS) has “Jump,” and rumors suggest that Verizon (VZ) is prepping “Edge.”

With contract-free pricing, consumers were able to untangle hardware subsidies from their monthly contract plan, freeing them from the big hardware markups. In reality, this also helped the carriers to avoid the costs of those subsidies after a new smartphone is activated (sometimes referred to as “iPain”).

The new wave of plans addresses another consumer complaint: the burn of signing up for a new smartphone, having a new version of the device released a few months later and realizing you still have nearly two years of payments to go — or a stiff financial penalty — before you can get it.

Even if you bought your current smartphone outright, it’s still annoying because you now have a $650 device in your pocket that you’ll have to sell before you can buy that new one.

If you suffer from either of these afflictions, then Next, Jump and Edge could be the recipe for smartphone nirvana. If you currently hold onto your smartphone for a few years before breaking down and replacing it, then not so much.

Generally speaking, here’s how I see this working out for the various parties involved.

Winners

Compulsive upgraders/early adopters. Some people simply must have the latest and greatest device. These people can actually come out ahead in the game, especially those that take advantage of “Jump” to get themselves a brand-new phone every six months. They’ll never miss out on new smartphone bragging rights, and through low monthly installment payments (a Galaxy S4 adds $32 to your monthly AT&T service plan through Edge), the days of having to pony up big bucks to get the latest must-have phone are done.

Consumers who like to upgrade yearly. This plan also benefits people who don’t mind paying a little extra each month to avoid the hassle of selling a device (once the new “must-have” smartphone arrives). They can’t recoup the cash from selling their near-new device to offset the investment in a new one, but they get that new one without any of the reselling inconvenience.

Wireless carriers. As PC Mag’s Sascha Segan points out, “it’s your one human brain against a company full of accountants and computers.” In other words, AT&T et al. have crunched the numbers, and you can bet there are few scenarios where they might actually lose out with this offer. Compulsive upgraders aside, the plans seem pretty heavily weighted in favor of the carriers economically — and they get their hands on a steady source of relatively current devices they can refurbish and resell to entice cost-conscious customers.

Losers

Average consumers. Admittedly, these plans do offer consumers more choice, and choice is good. But for most people, opting for “Jump” or “Edge” over the standard subscription model or buying a new smartphone outright will end up costing a lot of extra cash.

Hard to Tell

It’s hard to say how this will affect smartphone manufacturers — particularly “premium” vendors like Apple (AAPL) and Samsung (SSNLF). If these plans turn out to be popular with consumers, they could help to light a fire under the U.S. market.

The early adopters who helped drive phenomenal growth in previous years are losing interest in paying the money up front to grab the “latest and greatest” flagship smartphone that turns out to be a spec bump from last year’s model. Plans like Edge, Next and Jump could reinvigorate this group, helping to boost flagship smartphone sales. With devices being less expensive (up front) and easier to upgrade, established players would be in better position to defend against the lower purchase price of “good enough” smartphone competitors.

On the other hand, any take-up in these plans could change the dynamics in the growing budget smartphone market. Right now, a lot of upgraders’ smartphones don’t end up back in circulation; some even get handed down to kids — iPhones are much more likely to enjoy this second lease on life than are Android or BlackBerry (BBRY) devices.

But under these new wireless plans, owners must turn in their existing smartphone to get the new one. Carriers charge a fee if there are any damages to their existing device (reducing refurbishment costs), and those devices are likely to end up back on shelves, competing against low-cost entries from manufacturers.

Apple, for example, might find that if it introduces the rumored iPhone Mini in the U.S., the budget smartphone might not just be up against low-priced models from Samsung, LG or Huawei … it could also be competing against its own refurbished flagship iPhone 5S being offered through wireless carriers.

Bottom Line

There’s still too much going on in the mobile market to say how hardware subscriptions will play out. Wireless carriers continue shaking up their plans in an attempt to lure customers from each other, while eying expansion outside the U.S. as a growth strategy. Meanwhile, smartphone manufacturers are targeting China and the low- and mid-markets in the U.S. for growth — even as Chinese smartphone manufacturers begin to aggressively target American consumers.

The mobile market might be a maturing one, but it’s seldom boring.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/07/who-wins-when-consumers-are-offered-a-new-smartphone-every-year/.

©2014 InvestorPlace Media, LLC

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