High-End Smartphone Sales Unhurt by Installment Plans
Ever since US carriers began experimenting with installment plans and no-contract options designed to transition customers away from traditional two-year contracts with their subsidized phones, there has been speculation that high-end smartphone sales would suffer. The shift toward no contracts and installment plans was kicked off by T-Mobile in March of 2013, when CEO John Legere announced a move away from subsidized phones.
Installment plans differ a little from carrier to carrier, though the premise for each is fairly similar. With cute names like “Verizon Edge,” “AT&T Next,” and “Sprint Easy Pay,” the customer signs an agreement to pay for the phone over a certain number of months. For most plans, there is no initial payment, other than tax on the purchase price. Most carriers offer buyers an option for upgrading to a new phone after a certain period, typically 12 to 18 months, by signing a new agreement. This option comes at no charge from some carriers, while others charge a few dollars each month for the privilege.
A number of lease programs are also available offering lower monthly charges, although the user does not own the phone at the end of the lease period.
With a traditional contract, the user would pay an upfront charge for a high-end phone, usually going for somewhere in the $199 to $249 range. They would also pay a monthly amount for voice and data, and a repayment of the amount of the subsidy the carrier had applied towards the phone. Since the subsidy-repayment charge is unseen, most consumers believe their total cost of ownership (TCO) for the phone is covered by the initial payment they make.
Confused? So are many consumers, who understandably appear to be thinking of installments and no–contract plans in the context of the traditional contracts they knew, particularly when it comes to replacements and upgrades. They wait for the initial term to end, and then upgrade.
With the end of subsidies, many feared that consumers would opt for cheaper devices, or certainly think harder about buying the high-priced flagship device.
In the three months ending August 2015, 47% of the smartphones sold in the U.S. were linked to installment plans. During this same period, smartphone purchases linked to traditional contracts, once the bulk of such transactions, represented only 20% of sales. The remaining 33% was made up of prepaid plans.
This overall trend appears to apply nearly equally to the two main mobile operating systems. In the three months ending August 2015, 51% of iOS sales were associated with installment or no-contract plans, 37% were on a traditional contract, and 12% were on prepaid plans. For Android, 46% of sales were on installment plans or no-contract, 15% were on traditional contract, and 39% were prepaid.
For the three months ending August 2015, this dataset clearly dispels the fear that these new data plans would negatively impact high-end device sales. Looking at all installment or no-contract plans associated with iPhones, 55% were for an iPhone 6, and 22% were for an iPhone 6 Plus. These two devices account for 68% and 9% of traditional contracts, respectively. When it comes to Samsung’s products on installment or no-contract, the Galaxy S6 made up 36% of sales, while the Galaxy S6 Edge accounted for 12%. In the case of traditional contracts, these devices accounted for 28% and 5%, respectively.
Apple recently launched an upgrade plan in the U.S. that allows buyers of the latest iPhone models the option to get a new phone every 12 months. Given that only 8% of iPhone sales went directly through Apple in the three months ending in August, this program might not be the threat to carriers some imagined, but it will offer Apple a way to strengthen its relationship with customers. The program also will help Apple get more of the previous generation’s devices into the refurbished market.
It has been rumored that Samsung is planning to announce a similar program soon, but they will have to face the challenges of not having a retail presence as strong as Apple’s. Samsung has its own sales counters within some Best Buy stores, but in the three months ending in August, the chain represented only 10% of Samsung’s total sales – and this number includes overall sales at Best Buy, both carrier and store sales combined. Moving this program online might be a better option for Samsung since, for the three months ending in August 2015, the brand saw 24% of its sales occur online.