Subsidy vs. Installment Models-Economic Impacts
As of January 2016, there were no longer any subsidy plans offered by the top four carriers in the US. In Canada, while subsidy plans are still possible under Canadian regulations, all the major carriers have moved to installment plans.
- In an installment plan, users pay for their smartphones in equal monthly payments added to their monthly service fee invoice. They often have the flexibility to trade in or upgrade to a new smartphone before the phone is paid off. When it is paid off, the payment amount disappears from their monthly bill. The users pay the full price of the phone plus interest. In effect, the carrier made a profit on the transaction.
- In the traditional subsidy plan, a customer entered into a two-year contract with the wireless carrier. The carrier subsidized the cost of the phone expecting to make up the cost through service fees. The carrier assumed the risk that the subsidized amount would be covered for that customer, or for the average of all customers.
- In 2014, the idea of installment plans was covered in technology and market watch magazines. Recommendations to consumers was to move to the installment plan as it allowed more freedom for ultimately lower cost over the long term.
- As of January 2016, there were no longer any subsidy plans offered by the top four carriers in the US.
- While subsidy plans are still possible in Canada, the majority of the carriers have moved to installment plans. Once a customer reaches the end of a two-year contract, the phone is considered to be owned by the customer. Telus policy is to move them to a BYOD plan if they request it.
- A financing plan is implemented at the time the customer signs up for a new service plan, unless the customer brings their own device. The hardware required to set up a new service, such as the SIM card needs, to be compatible with the phone.
- Installment plans dominate offerings in the US and Canada.
Economic Impact — Canadian Carriers
The financial reports from the Canadian carriers do not show the revenue from services versus the revenue for cell phone. The Canadian government collects statistics for wireless carriers under the umbrella of the CRTC (Canadian Radio-Television and Telephone Commission.) We have therefore provided revenue information for the industry as a whole, as provided by the CRTC. The most recent year this data is available is for 2017.
The ARPU (average revenue per user) was:
A complete set of the data released by the CRTC is available on this spreadsheet.
Economic Impact — US Carriers
The FCC (Federal Communication Commission) also does not collect the revenue from cell phone hardware transactions. We have therefore provided revenue information for the industry as a whole. The latest year FCC data is available is 2016.
The ARPU (average revenue per user) was for 2016 was
For the industry, the average ARPU in 2016 was $15.93.
From roughly 2007 until 2013, the smartphone market posted double-digit growth year after year. However, growth began to slow starting in 2013 or 2014. "In 2016, it was suddenly in the single digits, and in 2017 global smartphone shipments, for the first time, actually declined." Industry analysts project that the plateau has been reached and the sales figures will continue to decline.
We were unable to find specific information on the impact of the installment model as no wireless companies report that revenue separately. We started by searching news sites and magazines that review cellular hardware and plans. We found descriptions on how the industry and consumers were moving away from the subsidy plans to installment, but no mention of specific impacts on the industry. We did find one article that explains the difference in the financial impact between the two, which we included in the findings.
Still looking to find specific metrics on profitability, average revenue per user and subscriber growth as it related to the financing of phones, we looked through the financial reports of the major retailers that were reported on in the previous assignment. None of the financial reports contained any specific information about the sales of cell phones. All related sales and expenses were reported as wireless services. Knowing that both the CRTC and the FCC collected and reported on detailed data for the wireless industry, we then went to Canada's Open Data site for the CRTC. We have provided a spreadsheet of the data available from that site. Again there was no mention in any of the many reports of cell phone sales.
We then turned to the FCC and searched their latest annual report for information on the economic impact of selling phones on the installment plan. Nothing was available. Their report did identify the data we were looking for as a specific exclusion from their data as seen below. "Prices do not include any additional charges such as for equipment installment plans, insurance, international use, or mobile hotspots. If a service provider includes any such feature as part of its unlimited data plan without extra charge, the above price would include this feature. Further, the above prices do not include any onetime charges paid, such as activation fees and termination fees. Prices and the specifics of the plans are subject to change."
Therefore, we provided the requested information — profitability, average revenue per user, and subscriber growth for the industry as a whole in each country.