For years, the process of buying a phone remained largely the same. You paid $200 for a flagship, or nothing for a clunker, and in exchange agreed to ride out a two-year contract with the carrier offering the best deal (or service) at the time. All that went away in 2015. People don’t buy phones like they used to. Now they buy them like cars.
The key difference between how people bought phones then and now is consumers know what a phone really costs. That knowledge could have transformative effects on your relationship with the device you rely on most.
Got No Strings
Remember carrier contracts? Those were the days! Or the years, rather; it’s the only thing most cellular customers in the US ever knew. It was an imperfect system, but it worked well enough before anyone really knew what a data plan or smartphones was, much less what they should cost. It didn’t hurt that the only real carrier options, in much the country, were AT&T or Verizon.
They offered a simple deal: We’ll subsidize the price of your phone, as long as you stick with us for two years. (Think that was bad? Many Canadian cellular contracts lasted three years until new regulations forced carriers to phase it out last spring.) This is the magic that kept very few people from ever paying more than $200 for an iPhone with a retail price three times that.
Then a funny thing happened. T-Mobile, in an effort to distinguish itself, eliminated contracts in 2013. This year, Verizon did the same. Sprint is phasing them out. AT&T still offers a two-year contract, but as one of several plan options.
In terms of what comes out of your wallet, there’s no seismic shift here. In many cases, carriers replaced contract with monthly payments or leases like T-Mobile’s Jump! On Demand plan, wherein you never actually own your phone. “It’s mostly an accounting change,” says Jan Dawson, chief analyst at Jackdaw Research. “Most customers are still paying a very similar amount to what they were paying under the subsidy model.”
Even if the pricing works out the same for most people, the structure has changed entirely, and with it, how consumers buy phones—and how those phones get made. To see how, look at how automakers sell cars.
Kicking the Tires
Like most analogies, this one’s not perfect. Cars are an order of magnitude more expensive than phones, and generally have longer lifespans. Think, though, of how you go about buying a car. You have no shortage of brands from which to choose, and models within those brands. You can spend a large sum of money upfront, pay it off over time, or lease it. You can buy new, or save some money and go with a used model. You live with your choice every single day.
Think, too, of the factors that go into your choice. You must weigh whether you’ll bother selling the car later—not to mention the odds you’ll break it before that’s an option—or driving it into the ground. You must carefully align your budget with the features you require, knowing the corners you’re willing to cut.
Monthly payments are going to accelerate the phase-out of mid-tier devices.
All those decisions now apply to buying a phone. And that transition will make a big impact on not just consumers, but manufacturers.
“Vendors have to be smarter about the marketing, positioning, and inclusion of certain features,” says Tuong Nguyen, analyst at Gartner Research. “Before that almost didn’t matter. You could advertise all you want, but I’m on a budget, and the budget’s zero dollars. Tell me which one is zero dollars. Now it’s more like buying a car. I’ll choose a brand, and within that brand, which of those features do I prioritize the most?”
It’s early yet, but the shift also means consumers will see different kinds of phones on the market. Specifically, monthly payments will accelerate the phase-out of mid-tier devices. Despite their stupendous prices, premium phones will end up selling better than ever. That may seem counterintuitive, but remember that breaking a phone’s price down into 24 monthly installments can make even a $250 difference in devices seem much smaller.
“Since the price customers are focusing on now is the monthly payment, the difference between a really high end phone and a mid-tier phone is just a few dollars,” says Dawson. “As such, consumers are opting for more premium devices than they have in the past, even though they’re ostensibly paying a higher portion of the price explicitly.”
Those paying up front, meanwhile, naturally gravitate toward phones on the cheaper end of the spectrum; Dawson cites ZTE and Huawei as examples of manufacturers who have gained a foothold in the US market through rock-bottom pricing. And why shouldn’t they? You can buy a $99 smartphone today that would have been a flagship device two years ago, if that.
The most dramatic repercussions from this shift in how people buy phones is yet to come. A glut of refurbs and “gently used” phones will appear once consumers turn in their phones at the end of a lease or decide to upgrade once they’ve paid it off. “This is creating a far larger supply of phones for the secondary market,” says Dawson. “That will have two impacts: it will flood that market, which may depress prices; and secondly, it will increase the supply of lower-cost second-hand smartphones, which will further erode the market for new phones at similar price points.”
Apple will, of course, be the primary instigator in this because it encourages customers to embrace a yearly iPhone upgrade plan. Every major US carriers offer variations on that. Expect to see the repercussions in September, when millions of iPhone 6S owners will be eligible to trade their phone for whatever shiny new rectangle replaces it. All those slightly used iPhone 6S units will find their way back into stores, one way or another. And while the Nexus 5X or OnePlus 2 might seem like a great buy now at $300 or $400, they’ll have a lot more competition from the legion of somewhat affordable refurbished Apple handsets that are coming.
It’s not just Apple, though, and it’s not just about the trade-in cycle. Low-end manufacturers stand to benefit as well from the simple fact of our collective clumsiness. When you break a phone, you’ll need to pay it off in full and buy a new one at full price. “That impacts the supply chain enormously,” says Nguyen. “You have a larger supply of available devices. Say I crack my Galaxy S6. Maybe it costs $200 to fix that crack. If I’m budget constrained, and it costs less than that to just get an S5, maybe I just choose that.”
Cheap, used, and refurbished phones always have been available, of course, but at the fringes of the market. Now, buying a used phone will as common as buying a used car, for many people not just a valid option, but the first and only option.
In fact, just about the only part of the smartphone food chain that won’t be affected by the changes in the way we purchase phones now will be the carriers, who are simply shifting money from Column A to Column B. That’s just as well; with the advent of new technologies that make it easier than ever to hop from one mobile service to another, they’ve got enough to worry about.