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James Dennin, Kapitall: The two year contract is so Bush era. How will the end of phone subsidies affect mobile telecom stocks?T-Mobile (TMUS) shook up the mobile telecom industry last March when it announced it would no longer subsidize users’ new phones. The company reasoned consumers would rather pay lower monthly bills than save money up front on their new phone, and the move allows buyers to upgrade phones more often.
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It also lets phone companies avoid paying its users’ hardware costs in hopes of recouping the money over the course of the contract. This means service providers can boost their gross margins and free up cash for other purposes.
Competition pros and cons
Sprint (S), who are the also-rans in mobile telephone service, are aggressively attempting to even the playing field by poaching users from
Verizon (VZ) and
AT&T Mobile (T). The two dominant players created their economies of scale in the early days of mobile telephony with the device subsidy strategy. Before the US reached market saturation, phone companies were happy to spend money to acquire customers, keeping them legally bound to be revenue streams for a specified period of time.
But now that most US residents who are likely to own a mobile phone have one, this strategy makes less sense. In the last year all of the major players have rolled out plans that allow trade-in phones at any time. AT&T's Next, Verizon's Edge or Sprint's Easy Pay programs allow customers to hand in their phones before the two year contract period has expired. AT&T’s Next, for instance, is styled as an insurance program to “protect” users from having to use an old, obsolete phone before they are eligible for an upgrade.