All four major US operators move away from handset subsidies

Multiple reports suggest Sprint is joining T-Mobile, Verizon and AT&T in moving away from two-year contracts, driven primarily by the desire to phase out device subsidies.

Androidcentral.com received a tip that Sprint will no longer offer device subsidies to new customers, which is consistent with a pledge made by its CEO in the middle of 2015. At the start of the year Engadget got a tip that AT&T is switching to its handset leasing programme – AT&T Next – as the primary means of selling hand as of this week. Verizon had already switched last year and T-Mobile, which mainly targets the prepaid market, has been doing this for a few years.

Operators all over the world have been moaning about the cost of subsidies for years, but have been afraid to unilaterally drop them for fear of handing an advantage to their competitors. One company that did was Telefónica Spain in 2012, joined briefly by Vodafone before the latter lost its nerve. The problem was Orange Spain which, initially at least, appeared to be gaining subscribers as a result of sticking with subsidies.

There have been regular calls for unanimity within certain markets via the media that have come dangerously close to recruiting a cartel, but it inevitably came down to one operator enduring the initial churn long enough to establish a viable post-subsidy business model to prove the case.

The ultimate aim is not to get rid of all subsidies but to decouple the cost of the handset from the voice and data services. Programmes such as AT&T Next offer leasing arrangements rather than outright ownership of the device, while others offer a straight hire-purchase model. The SIM-only market remains relatively small and as long as most consumers find it difficult to raise the funds independently to buy handsets outright, operators will continue to see the business benefits in assisting them.

The main reason subsidies existed in the first place was to attract subscribers, but that may have run its course as a useful business model. It will have been tempting for AT&T or Sprint to exploit the potential advantage of being the only operator to continue with subsidies so the fact that they haven’t implies the business incentives are no longer there. It wouldn’t be surprising to see a lot of other postpaid-dominated markets such as Western Europe follow suit over the course of 2016.