Installment Plans are Similar to "Device Subsidies;" Service Provider Operating Income Impact is Quite Different

One might argue there is little difference between mobile device subsidies and offering consumer financing plans. That is likely more true from a consumer perspective than from a service provider perspective.  

Whether a consumer buys a device on an installment plan, or has the subsidy embedded in the recurring cost of service arguably is a matter of indifference, if the installment charge and the embedding of that cost is recovered over the term of a two-year contract.

But the difference could matter significantly for a service provider. Since few consumers willingly will pay outright for a $600 smartphone, it was necessary for service providers to lower the adoption barrier by bundling the device and the service.

"When you're growing the business initially, you have to do aggressive device subsidies to get people on the network," Randall Stephenson, AT&T CEO, has said. At 90 percent or higher adoption, the economics arguably change.

In the subsidized device model, the carrier actually buys the phone, not the end user, and then the service provider recovers the cost over the length of the contract. But that has a financial impact, hitting earnings.

In principle, if the customer buys the phone, but the carrier offers an installment plan, the device purchase no longer is carried on the mobile service provider’s books, but can be recorded as a device sale.

Reducing the earnings drag devices represent will become more pressing when data revenue growth tied to smartphone adoption reaches saturation.

It isn’t the first time mobile service providers have had to deal with saturation. Similar concerns about the next wave of revenue generation happened when feature phone penetration got to about the 70 percent or 80 percent range, and revenues from basic subscriptions and then text messaging began to slow.

Internet access revenues associated with smartphones supplied the revenue answer. But as that revenue source slows, in terms of growth, operating costs become more crucial. So changing device inventory costs becomes important.

If device costs can be contained, if average data consumption by each smartphone user continues to grow  year-over-year at a 50 pace, if most people using phones use smartphones and if mobile service providers can benefit from consumption-based usage plans, the revenue growth issue takes care of itself.

The other issue is that as 4G becomes the network for postpaid users, and as users migrate off 3G to 4G networks, the 3G network becomes the platform for prepaid and value users, in a way that preserves a product distinction between postpaid and prepaid products.