Overview

Subsidized Model

• A wireless subsidized model or contract bears a sizable portion of the cost of the phone paid by the carrier up front. The result is a smaller contract price for the consumer.
• To protect the initial cost of acquisition (COA) by the courier, the consumer must sign a contract for a period of months. This is typically 24 months in both Canada and the United States.
• The subsidized price is recovered over the length of the contract.

Installment Model

• In the installment model, the full retail price (FRP) is shown up front to the consumer.
• The FRP price is divided over the term of the plan into monthly repayments. Most plans are 24 months.
• In Canada, the installment plan can include a payment up front. If there is payment up front, it will reduce monthly repayments.
• Interest is not charged over the repayment period of the wireless phone.
• The phone belongs to the consumer at the end of the plan.

Economics

Model Cost Comparison

• When comparing the purchase of a wireless device of around $600 in value between a subsidy and outright payment contract model, the following applies:
• The following items are charged for in the subsidized model, a monthly service charge, activation and retention ETF/EU waiver.
• Total monthly cost of the $600 phone is $46.33.
• The following items are charged for in the outright payment model, a monthly service charge, activation, retention and the outright cost of the wireless phone.
• The total monthly cost of the phone on the installment plan is $69.99.
• From this exercise completed by NPI, the cost of an outright payment contract model is more expensive than a subsidized contract model. This is primarily because a subsidized phone contract has a reduced cost on the phone model bought.
• The idea of a subsidized model is about retention, keeping the consumer in the carriers stable for as long as possible, increasing your profit per client over time.
• In an installment model, there is a general incremental profit over subsidized contracts.
• Wireless carriers raise the finance for the phones through bank loans and public security.

Profits

• Because the cost of an ever-improving wireless phone is increasing constantly, the risks to profit margins are high for the carriers and have dropped the subsidized model.
• All the leading carriers in Canada and the United States only offer the installment model now. AT&T stopped using the subsidized contract model in 2016.
• The 24-months installment contract is the normal contract length, but longer installment contracts are now being explored by carrier companies. This will keep the consumer locked in for longer with increased profit margins.
• According to Verizon, their previous consumer subscribers are not replacing their phones. This indicates both the subscriber and profit margins are down.
• An article by the New York Intelligencer supports Verizon’s findings and that a smartphone plateau has been reached. United States wireless sales are in a decline across the board. This is expected to continue into 2022.

WIRELESS PHONE COMPANIES IN CANADA that use a subsidy model

ROGERS

•  Rogers uses the subsidy model for selling phones.
• This involves partial payment of the phone upfront with the remaining portion collected in service fees monthly.
• It is believed that this model gives customers the most options and the highest value in making purchases according to Sarah Schmidt, the spokesperson for Rogers.
• In 2017, they made a slight adjustment ("one price for the service") to their subsidy model to cater to high-end users which makes it a little similar to an installment plan.
•  Adam Ilkowitz, a Citigroup analyst said, the new adjustment may result in lower cost for customers.
• However, the company does not plan to change to an installment model because the company doesn't see the real benefits of installment model.

TELUS

•  Telus uses the subsidy model for selling phones.
• The company has recently launched an initiative to help young adults who are leaving the foster care system to have a smartphone with a plan (TELUS Mobility plan) that is fully subsidized.
• Telus reported that the company had high expenses to acquire and retain customers because of the subsidies for smartphones, especially during major promotions.
• Telus does not plan to switch to installment plans because the company is satisfied with the results of the subsidy model.

FREEDOM

•  Freedom uses the subsidy model for selling phones.
• In 2017, the company offered device subsidies ranging from $120 to $1,200.
• If customers pay more money upfront then their monthly payment would be less over 24 months.
• To compete with the wireless phone company leaders in Canada (Rogers, Telus, Bell), Freedom offered maximum subsidy of $0 down payment using its MyTab Boost.

BELL

•  Bell uses the subsidy model for selling phones.
• Upon expiration of the customer's 2 year-contract, they can get another subsidized device and plan or continue with the same one.
• Bell does not plan to switch to installment plans.
• A new program under this model that was recently launched is called "Pay Less Upfront" which allows customers to keep or return their device at the end of the two-year agreement.

WIRELESS PHONE COMPANIES IN THE U.S. that use finance/installment model

AT&T INC.

•  AT&T uses the installment model which can be paid off between 24 and 30 months.
• Once an agreement is made with the company and customers for a device, the customer is solely responsible for it once on their possession but there is an insurance for mobile devices that can be bought to help with the protection of the device.
• This company offered the subsidy model in the past but stopped offering this option on January 8, 2016.
• Subsidies were too expensive for both the company and its customers. It was also considered as not transparent and payment was long-term. But the installment plan is cheaper and has more benefits like an early upgrade of the device for customers.

VERIZON COMMUNICATIONS INC.

•  Verizon uses the installment model with a 24-month agreement.
• There is an additional fee to add a line or to change/upgrade one's phone and the only limit in having several devices on the plan is one's financing limit.
• Verizon stopped offering the subsidy model on August 2015 for new customers but continued to offer the service to old customers up until January 2017.
• This helped the company to cut back on expenses and create cheaper plans for customers.
• There has been an increase in the cost of device upgrade for customers, which enables the company to offer a 4G LTE network.

Research Strategy: