Will smartphone subsidy changes slow down the upgrade cycle?

Will smartphone subsidy changes slow down the upgrade cycle?

For years the red-host smartphone market has been driven, at least in part, by subsidies from wireless carriers. In exchange for another two-year contract, you can get a new iPhone for $199—and when that two-year period is over, you can get another one! Every two years, most people I know buy a new phone, because why not?

Of course, an iPhone doesn’t cost $199. The “$199” 16GB iPhone costs $649 if you buy it unlocked or without a subsidy. Wireless carriers know that people are less likely to buy a $649 phone than a $199 phone (and that some people can’t afford to pay $649 all at once), and the extra $450 can be easily spread across 24 monthly phone bills as an additional $18.75 embedded inside a larger charge for a smartphone data plan.

But the sands are shifting in the U.S. carrier world. Subsidies are starting to fade away, and I think it’s a good thing. Under the previous approach, your wireless bill didn’t go down after two years—until you got a new phone, your carrier would just pick up an extra twenty bucks per month in profit. Why not buy a new phone every two years, then? You’re already paying for it.

Now U.S. carriers are shifting gears to what they’re calling installment or financing plans. This has been happening in other countries for years, and it works similarly to how the old system worked. You can “buy” a new smartphone for a low price (in the case of some plans, a lot less than the current with-contract purchase price), but a monthly payment is added to your bill for a period of your choosing until the cost of the phone is covered. If you keep your phone for another year after you’re done paying it off, your bill goes down! This seems utterly reasonable.

But here’s the potential dark side of this transition: I wonder if it will slow the dramatic growth of the smartphone market. Smartphones are the miracle product of our era. Their growth is insane. It won’t be too long before most of the people in the world have access to wireless Internet on a small computer they carry with them. The tech industry throws around the term “revolutionary” far too much for my taste, but this is a case where it truly applies.

But in some countries, including the U.S., part of the smartphone sales story is the turnover. Many people are buying new phones every two years, driven in part by the carrier subsidy cycle. What happens if you can spend a third and maybe even fourth year with your old smartphone and save $20 per month on your wireless bill? Will people happily pay $199 and commit to a $20 monthly bill increase for the next two years in order to get a new phone?

Sure, some of us will. Some of us buy new smartphones every year, and AT&T has cleverly built an installment plan into its AT&T Next brand that markets directly to those people. But I also know a lot of casual smartphone users who could probably go three or four years without buying a new smartphone, especially now that the pace of innovation in the smartphone world has slowed dramatically from the first five or six years.

There’s been a lot of consternation about falling iPad and tablet sales lately, raising questions about whether tablet computers are a failure as a category. I don’t think so—I love my iPad and know a lot of people who love theirs, too. The tailing off of tablet sales suggests to me that potential users rushed in to buy a tablet and now are replacing those tablets at a very slow pace. How often do you need to replace an iPad? My son is still using my old iPad mini, which is a 2012 product based on 2011 technology. He loves it. We use our iPads for well more than two years—and there’s no subsidy to drive us to pick up the pace.

Is that the future of the smartphone industry? Sure, we’ll get itchy when there’s a new iPhone or Samsung Galaxy or whatever out there, but when confronted with the real prices of these products—even if it’s still shrouded by a monthly payment on your carrier—how many of us will decide that we can just wait a year, or six months, or until an accidental drop forces the issue?

My guess is that in the next year or two, you’ll start hearing reports about sagging smartphone sales, and everyone will be wondering why the greatest tech product category of the 21st century is having trouble. And it won’t be because our enthusiasm for the product category has cooled, but because of a shift in the way we buy those products.

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