Phone buyers are hanging up on subsidies, AT&T says

Almost 3 million picked the installment plan in the first quarter

Installment plans for cellphones are starting to squeeze out the time-honored practice of paying a subsidized price up front, AT&T says.

Buying installments is catching on in a big way, according to AT&T's first-quarter financial results Tuesday. About 2.9 million people signed up for the carrier's Next plan, in which subscribers pay for a phone in monthly installments and can trade it in for a new model after a year. That was more than 40 percent of AT&T's postpaid customer additions or upgrades for the quarter.

Paying in installments is an alternative to buying phones at a price subsidized by the carrier, the way most U.S. consumers have done it up to now.

AT&T introduced Next in July 2013 amid a flood of new plan options among U.S. carriers that was led by T-Mobile USA. Only 15 percent of AT&T's new subscribers and upgraders signed up for Next in the fourth quarter last year, so the plan seems to be gaining momentum. However, some of the uptake in the first quarter came from an offer that let customers upgrade their phones early, the carrier said.

U.S. carriers sell most of their phones at subsidized prices to draw customers in and then lock those subscribers into two-year contracts. With installment plans, subscribers still have to pay off their phones if they change carriers before they've made all the payments, but the monthly cost of the phone -- about US$15 to $50 on Next -- is spelled out on each bill. After 20 payments, the handset's paid for. AT&T says consumers like having a more "transparent" way to pay for their devices.

"Many customers have been choosing to move off the subsidy model," Chief Financial Officer John Stephens said on a conference call Tuesday. AT&T thinks this trend will continue but it's not ready to drop the subsidy model yet.

"I wouldn't suggest it would be eliminated as long as there's a significant number of customers who enjoy and prefer it," Stephens said.

If you're wondering where those trade-in phones go, Stephens said AT&T can sell them to customers of its prepaid plans, use them to fulfill insurance plans that cover phone replacement, or sell them on the wholesale market, as it began doing last year. The fact that AT&T uses the GSM family of network technologies, which is used around the world, helps it get good prices for the used phones, Stephens said.

AT&T's Mobile Share plans also are growing more popular. About 45 percent of its postpaid subscribers are on the plans, which let customers pay for one monthly bucket of data and use it on multiple devices. A lot of shared-plan users are buying big buckets, too: 46 percent of them have plans with 10GB or more per month, the carrier said.

Changes are coming in AT&T's prepaid business, where customers pay ahead of time for what are typically less expensive plans. With its acquisition of Leap Wireless out of the way, AT&T plans to relaunch that company's Cricket wireless brand in the second quarter, folding its own prepaid operations into that business, Stephens said. He estimated it would take about 18 months to move customers off the former Leap network, which uses CDMA, and onto AT&T's GSM-based system.

Stephen Lawson covers mobile, storage and networking technologies for The IDG News Service. Follow Stephen on Twitter at @sdlawsonmedia. Stephen's e-mail address is stephen_lawson@idg.com

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Tags smartphonesbusiness issuestelecommunicationfinancial resultsconsumer electronicsat&tCarriers

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Stephen Lawson

IDG News Service
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