How we buy phones

The way we buy phones is changing.  People in the mobile industry may be aware of these changes, but it is fair to say a lot of people aren’t. That’s because the process of paying for a phone is complex and often intentionally obtuse.

Why care?  The smartphone market is enormous.  Here is our in depth analysis of where we stand today from Asymco data.

mobile market

Here’s a brief rundown of how buying a smartphone works in the US in 2015, as well as some tips and tricks for getting the most bang for your buck.

THE OLD SUBSIDY REGIME

Getting a phone used to involve complicated contracts, penalties, and a rigid structure that kept people locked-in for years. All of this was done mainly to get people to pay off their phones without realizing how much it was actually costing them.

It used to be the cost of the phone was folded into a two-year service contract. Carriers would subsidize the full cost of the phone, so a buyer could get a $600 iPhone 6 with only a small down payment. But the buyer would still need to pay the subsidy back a little bit each month. That’s why the two-year contract was so important: it ensured that the buyer would pay back the full cost of their phone before they upgraded to a new one.

The problem was that these plans didn’t allow much flexibility. If the buyer wanted to upgrade to a new phone before the end of their contract, they would be charged a large fee.

 

THE SHIFT TO INSTALLMENT PLANS, AND WHY IT’S BETTER FOR EVERYONE

Eventually the carriers realized that they — and customers — could benefit by switching to a model that gives consumers the flexibility to upgrade more often. They started offering equipment installment plans (EIPs) that separate the purchase of service from the purchase of the device. Now, consumers get to pay for their smartphones over time without committing to a long-term contract. Customers pay for service month-to-month, and can upgrade their phones whenever they want as long as they pay off the full cost of their previous device.

This change is happening fast. T-Mobile was the first to get rid of contracts in 2013. Verizon was the last major carrier to embrace EIPs, and they’ve seen a huge growth in the number of consumers that are choosing them: 58 percent of their phone activations in the third quarter of 2015 were on installment plans compared to only 12 percent in the third quarter of 2014.  Below are more numbers from the past year.

postpaid

The EIP model is a much better deal for consumers. It’s a more transparent pricing structure; people now know what their phone is really costing them. They can also keep their old phones when they upgrade—a big benefit considering that a certified pre-owned smartphone can be resold for hundreds of dollars.

What’s even more fascinating is that these installment plans are spreading to places like India, where “EMI” plans are now a popular way to buy devices.  Rather than charge an interest rate or markup, the retailers simply withhold discounts for consumer who want to pay monthly.  These plans also required credit checks, so are really for the top 1%.

PRICING INNOVATION: LEASING AND PREPAID PLANS

Consumers can also lease smartphones now. The arrangement is similar to an EIP, except that after a certain number of monthly payments, the customer has to trade in (not keep) the phone.

Carriers like the leasing arrangement because it sets the consumer up for a long-term relationship where they are continually upgrading and trading in their old phone. But for most consumers, it makes more sense to use an EIP through a carrier or PayJoy, where you can pay out your balance at any time and own your device. Or, opt for a hybrid like the Apple upgrade plan, where consumers are eligible to upgrade after 12 payments, but can also make 12 more payments to own their iPhone outright. The main benefit of the leasing arrangement is that you can skip the process of reselling your old phone.

Another option for getting a phone is to use Mobile Virtual Network Operators (MVNOs) such as Tracfone, which sells its phones through Wal-Mart and other retailers. MVNOs buy access to multiple carrier networks at wholesale, so they can play them off each other to get the best price for minutes. MVNOs often use prepaid plans, so there’s no need for a credit check, and there’s a ton of low cost options out there. There’s also no contract or commitment of any sort. MVNOs are a great option if you don’t have credit history and you don’t want to spend a lot.

HOW TO GET THE BEST SMARTPHONES TO THE UNDERSERVED

But what if you’ve got a tight budget, limited credit history, and want to use a high end phone not offered by an MVNO? Unfortunately, the major carriers only offer their EIPs and leases to consumers with good credit, so a lot of Americans are still being excluded from this business model. These people can get prepaid smartphones for cheap, but these tend to be lower-end devices. For the high-end smartphones that cost $600 or so, these consumers can’t qualify for the installment plans or pay that cost upfront.

PayJoy fills this gap by giving people an option to pay over time for premium smartphones regardless of their credit history. Our installment plans give a new option to a large segment of the population that hasn’t yet had convenient access to the best smartphones. Once a consumer pays the phone off, they can keep it, trade it in, or sell it themselves.

The process of buying a phone has become more transparent; now we’re working to make it more accessible to the next billion consumers.

With contribution by Bryan Jinks of Hippo Reads.

How we buy phones

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