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Summary

The way US operators sell devices to subscribers today is almost completely unrecognizable from how they were sold just three years ago. At that time, few people would have believed that by now two-year contracts would be nearing extinction and the increasingly popular way to buy devices would be without attached subsidies.

Two and a half years ago the equipment installment plan (EIP) really started to take hold as T-Mobile, then AT&T and Verizon, and finally Sprint started to offer this as an option to consumers. Today, two-year contracts with subsidized devices have taken a backseat to EIP. And the evolution continues, with leasing starting to gain traction as well. Some device manufacturers see an opportunity in being more involved with customers’ device financing and upgrade programs.

Trends in device leasing and EIP

Device leasing is growing in popularity

Handset leasing is being met with caution in the US market, just as EIP was initially. Sprint and T‑Mobile dove fully in with handset leasing and are the only two offering this option for obtaining a device.

AT&T is open to offering leasing as a supplement to its EIP offering if customers are interested, but Verizon has said it is not currently considering leasing. Verizon was also the last of the major US operators to embrace EIP.

When T-Mobile started offering leasing in June 2015, it did so as the primary way to distribute handsets. For Sprint, which has had device leasing for a longer time, leasing has surpassed EIP. In 3Q15, Sprint said 51% of the 64% take rate of device financing was leasing, up from 3% of 27% a year ago. In total, at the end of 3Q15, 37% of postpaid customers were on device financing – 22% on leasing and 15% on EIP.

As the newest iPhones were coming out in September 2015, Sprint and T-Mobile used their leasing programs to present rock-bottom offers for the new iPhones: T-Mobile for $5/month and Sprint for $1/month. These prices were promotional and only for 16GB phones, which many savvy users are moving away from since the iOS takes up half of the 16GB storage. All the major US operators will likely have an iPhone leasing program in the near term (despite what Verizon says at the moment), and Sprint and T-Mobile will probably offer an early upgrade to the newest model when it comes out in March 2016, starting a new lease and ensuring the customer stays with the operator for another term.

The bottom line is that leasing can produce even more loyalty than EIP. Leasing provides customers with attractive lower monthly device payments than with EIP, but at the end of the term, the customer owns nothing: either they must purchase the device in full at a modest discount or lease another device. Like EIP with early upgrades, leasing helps ensure the cycle continues and the customer continues to upgrade to new devices and doesn’t churn.

Device manufacturers are starting to offer their own EIPs

While operators are exploring leasing as an additional way to provide subscribers with devices, the device manufacturers have decided they want in on the programs that help to get new devices in subscribers’ hands every year or so.

With the most recent iPhone launch in September, Apple introduced its own EIP and annual device upgrade program. Not long after, in October 2015, ZTE announced it will offer its own EIP to be available with any ZTE device. Samsung is also considering an EIP and device upgrade program for its Galaxy line of devices.

These offers compete directly with EIPs offered by operators, which are nevertheless upbeat about the opportunity with secondhand devices as a result of these EIP-with-early-upgrade programs. Operators may be interested in buying the slightly used phones, if at a price that makes sense, to use in their insurance programs and for the prepaid segment.

The stickiness of operator EIP programs may be a challenge for the uptake of device manufacturer EIP programs, such as Apple’s. If a customer is already on one of the operator EIP programs, it will be difficult for them to switch to Apple’s, unless they are willing to pay off the remaining price of the device in a chunk or wait out the full term of the operator’s EIP (usually 24 months).

An EIP-and-upgrade program like Apple’s is another option for subscribers who are not already on an operator EIP program to get involved – and with slightly different benefits. What Apple offers that operator EIP programs don’t is AppleCare+ and an unlocked device, the latter of which gives the subscriber the freedom to move between operators. A program like Apple’s is a choice for the subset of customers who are just coming out of a traditional two-year contract.

The bottom line is that, when manufacturers are able to engage in their own EIP programs, they can keep customers locked in by offering early upgrade options whenever a new model comes out, keeping customers brand-loyal. This will work best for device series that garner a following, such as the iPhone or certain Samsung series, for example.

Both leasing and device OEM involvement in EIP are newer and emerging trends. We have yet to see how this space will evolve, but it’s clear that we continue to move further away from the traditional two-year contract with subsidized devices and along the way produce more loyalty, whether to a manufacturer or an operator.

Appendix

Further reading

Device-Financing Business Models,TE0009-001474 (December 2015)

“Device financing: Apple early upgrade program steals operators’ thunder,” TE0004-001040 (September 2015)

“Sprint’s iPhone for Life leasing program repackages installment concept,” TE0001-000882 (September 2014)

Author

Kristin Paulin, Senior Analyst, North & South America

kristin.paulin@ovum.com

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