Earlier this year, T-Mobile ditched contracts and carrier subsidies. Rather than bake the cost of a smartphone into a two-year contract, T-Mobile rolled out the Equipment Installment Plan, which lets customers pay for their handsets over a period of 20 months. The idea was to increase transparency and give customers a clearer view of the cost of their service and their device.
For example, T-Mobile asks customers for a $99 down payment on the Samsung Galaxy S4. It then asks customers to pay monthly installments of $24 for 20 months to cover the cost of the device. T-Mobile did one important thing with its Equipment Installment Plan that makes the whole thing work: It dropped the price of its monthly service plans by $20.
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Most customers who walk into a wireless retail store today plunk down $100 or $200 for a new smartphone and walk out with a new phone and a new two-year contract. Smartphones often cost as much as $650. The monthly cost of the two-year contract includes fees so the carrier can recoup the cost of the handset, which is often about $450 over the 24-month life of the contract. In other words, about $20 of the price people pay each month for their cellphone service goes straight to recovering the device subsidy.
T-Mobile then debuted Jump. Jump is a program that lets T-Mobile customers upgrade to a new device up to twice every 12 months. They have to pay a $10 additional fee each month, but are able to trade in their hardware for a new phone and only have to pay the new down payment and adjusted monthly installment when they grab new gear. Because T-Mobile has stricken the device subsidy from its service plans, Jump isn't (too) a bad deal for those who like to get new phones more often than once every two years. It still puts a premium on the device payments, but at least customers aren't paying for the device twice. T-mobile's plan also provides insurance against damaged/lost devices.
Enter AT&T and Verizon.
AT&T Next lets customers upgrade every 12 months. It doesn't require an extra monthly fee, and also kills off the high down payment. For example, the Samsung Galaxy S4 would, under the AT&T Next program, require customers to tack $32 in monthly payments onto their service plan. After 12 months, the customer could choose to trade in their device and upgrade to a new device at no extra cost, other than the revised monthly payments based on the retail price of the new hardware. After 12 months, AT&T customers have paid about $384 for their GS4.
Verizon's Edge plan works a bit differently. Edge allows Verizon customers to finance handsets over time, which can be upgraded as often as once every six months. The finance terms are spread across 24 months. Customers choose a month-to-month service plan and then add the phone of their choice (plus its monthly payments). After six months, customers who want to upgrade to new hardware need to pay off half the retail cost of the phone before upgrading to a new one. After the device is half paid, they can turn it in, choose a new device and start all over again.
For example, if a customer wants a Samsung Galaxy S4, they'll need to make a $27 down payment and add $27 to their monthly service plan. After six months, they'll have paid for about one-quarter of the GS4, or about $162. They'll need to pay an additional $162 to cover half ($325) the GS4's full retail price ($649), and can then pick a new phone.
The important distinction between T-Mobile's Jump program and AT&T Next and Verizon Edge boils down to the subsidy.
Neither AT&T nor Verizon reduced the cost of their service plan to strip out the subsidy. That means if you choose either AT&T Next or Verizon Edge, you're paying for the phone twice. That's a bad deal. AT&T and Verizon should reduce the monthly cost of service plans by $20 to account for the fact that customers are paying for a greater share of the actual device cost, but they haven't and won't.
Smartphones are wonderful and exciting devices. They're also immensely frustrating in that each successive generation arrives every six months or so and leapfrogs the previous generation. That makes waiting two years between upgrades a bitter pill to swallow. It is nice that three of the four major carriers are giving customers the option to upgrade devices more frequently, but a little bit of math tells us that they're really interested in padding their own bottom line.