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Summary

In November, AT&T added a third device-installment plan option, Next 24, to a portfolio that includes Next 12 and Next 18. Next 24 is a 30-month installment plan that gives customers the option to trade in a device in good and working condition for a new one after 24 payments instead of requiring them to complete the full 30 months of payments.

Next 24 costs less over a two-year period than a subsidized device plus a two-year contract, a fact that might convince customers who have so far resisted switching from the device-subsidy model to do so.

Convincing holdouts to shift away from subsidies

Device-financing and early-upgrade program Next is AT&T’s alternative to device subsidies and early-upgrade offers on subsidized devices, both of which can hurt operators’ profitability.

AT&T launched Next in June 2013, and by end-4Q13, 1 million users – or 15% of all postpaid smartphone gross adds and upgrades – had chosen Next. The figure ballooned to 40%, or 2.9 million, the following quarter, and it has continued to grow. As of end-3Q14, 3.4 million users, or about half of all postpaid smartphone gross adds and upgrades, were on a Next plan. AT&T has 20 million smartphones on what it calls “pre-Next” pricing. More than 90% of users who upgrade their device in company stores take Next.

What makes Next 24 an important move is that it mimics the subsidized model: After 24 monthly payments, the subscriber can upgrade to a new device. And the total cost of ownership over 24 months is $220.92, lower than the cost of a subsidized device plus a plan of 10GB or higher and just $10.08 more than subsidy plans of less than 10GB. As a plus, the only amount due on day one is sales tax, usually about $50, compared with the $200 paid for a typical subsidized iPhone, for example.

The customers who AT&T is reaching out to with the Next 24 plan are those who don’t mind holding onto a phone for two years before getting a new one, whereas Next 12 and Next 18 are targeted at customers who want a new device every year or so. And these users are the least likely to have found an incentive to switch to Next so far.

The monthly payment for a Next 24 plan of 10GB or higher is $3.33 less than that due on an equivalent subsidy plan. Next 24 plans of less than 10GB cost $6.67 a month more than an equivalent subsidy plan.

A customer who doesn’t want to upgrade their device at 24 months still has six more months of payments to make. After that, their monthly payments are $15 or $25 cheaper than a comparable subsidy plan for as long as the device is kept.

AT&T benefits from the plans as well, notably through reduced churn, because Next 24’s term commitment is 30 months. If a customer upgrades at 24 months (or at any point thereafter), a new commitment of 30 months begins. Contract terms for subsidized devices are 24 months. Therefore, Next 24 has the potential to lock customers in for longer, reducing churn for the operator.

Appendix

Further reading

“Shared data plans: AT&T uses unsubsidized shared data plans to increase profitability and data-user numbers,” TE0009-001160 (February 2014)

Handset financing: US operators compete on upgrade programs to boost take-up of latest smartphones, TE0001-000571 (August 2013)

Author

Kristin Paulin, Senior Analyst, Americas

kristin.paulin@ovum.com

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