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The end of cheap subsidized smartphones

Mitchell Hartman Sep 10, 2015
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Apple unveiled the new iPhone 6s at the company’s launch event Wednesday in San Francisco. The price for the base model at Apple.com is $649. But with a two-year contract with a wireless carrier, the price drops to $199.

In the future, though, more consumers will be paying the full sticker price for new iPhone and Android smartphones — either up-front at the time of purchase, or in installments to the wireless carrier over time. In some cases, consumers will lease a phone from the wireless carrier and return it when they want to switch carriers or upgrade their phone.

To reduce their costs and compete for market share, wireless carriers are changing the way they price their services and devices, says telecom analyst William Stofega at IDC.

“The carriers are getting out of the business of financing phones and shifting the balance to the consumer,” Stofega says.

The top national wireless carriers are pushing lower-cost wireless plans with no lock-in, long-term contract, no offer of a cheap subsidized smartphone, and no periodic low-cost smartphone upgrade. Upstart T-Mobile started the trend; Verizon and Sprint joined in later.

Equity analyst Michael Hodel at Morningstar says the new pricing trend offers consumers more leeway as they make a cost benefit analysis on the life of their smartphone: Save some money now by waiting longer before upgrading or splurge each time there’s a new product rollout.

“That leaves the phone makers like Apple on the hook to create devices that compel customers to want to upgrade,” Hodel says. “And to take that extra expense of going with the latest device.”

IDC’s Stofega predicts that in coming years, smartphone makers will offer more tiered pricing and features to consumers. “We’ll see a shift from ‘bling-bling,’ to value devices that are nearly as capable as the higher-priced devices,” says Stofega. “We’ll see catch-up in terms of the ability of manufacturers to bring costs down moving forward.”

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