Subsidy vs. Installment Models-Economic Impacts
The key difference between wireless subsidized and financing/installment models is that a sizable portion of the phone price is carried by the carrier in the subsidized model. In the installment model, the full price is split monthly in equal installments over the full period of the plan with no subsidization. With the installment plan model, the wireless courier makes a marginally higher incremental margin. In both Canada and the United States, major wireless carriers no longer offer subsidized contracts. In addition, the cost of wireless phones is rising, resulting in a decline in subscriber growth. Below, we discuss this topic in more detail.
- 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.
- 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.
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.
- 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.