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AT&T's Ralph de la Vega: Subsidized Phones Are Going Away

"I think it is one of those options that is going to go away slowly," AT&T CEO of mobile and business solutions Ralph de la Vega said.

Asa Mathat

Like unlimited data plans, the two-year contract and the subsidized cellphone are on the endangered species list.

“I think it is one of those options that is going to go away slowly,” AT&T CEO of mobile and business solutions Ralph de la Vega told Re/code on Tuesday. The shift will happen, de la Vega said, “not because we insist on it but because customers will choose it less often.”

Already AT&T has been shifting its focus toward plans where customers pay full price for their phones by financing them over a period of months. An iPhone that would cost $199 with a two-year contract would cost $649 paid over a period of 18 to 30 months on these new plans. Nearly two-thirds of last quarter’s smartphone sales were on one of the so-called Next plans where devices are sold without a subsidy.

This week AT&T took a huge step toward doing away with subsidized phones by eliminating two-year contract pricing at third-party stores such as Best Buy and the Apple Store.

Smaller rival T-Mobile spearheaded the move away from subsidized devices when CEO John Legere eliminated the two-year contracts back in March 2013 and began selling all phones unsubsidized.

Though T-Mobile was an outlier at the time, it is a move embraced across the industry with all major carriers focusing on plans that separate the cost of a device from the cost to provide wireless service.

De la Vega acknowledged his smaller rival was first to the game, but said AT&T was already headed in that direction when T-Mobile made its move.

“T-Mobile and us came out within weeks of each other,” he said. “They got there maybe a week or two ahead.”

Regardless of the impetus, de la Vega said that the move is good for both consumers and carriers, allowing those who want to replace devices more frequently to do so while also letting people who use a phone longer get a break on the monthly bill.

Still unclear is whether, on average, customers will replace their phones more or less frequently when no longer tied to two-year contracts.

“We need to give it a little more time,” de la Vega said, speaking on the sidelines of Rutberg’s Future:Mobile conference in San Francisco.

Conventional wisdom is that a small number of customers — those who want to always own the latest and greatest — will upgrade every year, but that the average length of phone ownership will tick upward.

Sprint CEO Marcelo Claure said at Code Conference last week that he sees an opportunity catering to those enthusiasts. Sprint is planning an offer geared to customers who want the latest iPhone immediately.

Leasing the devices lets Sprint offer phones at slightly cheaper rates than what it or rivals charge when financing the full purchase price over the same period of months.

De la Vega said the added option is good for the market, but said he prefers the model in which a customer owns their device once it is paid off. One particular benefit, he said, is the fact AT&T often gets new business when customers give their phone to a friend or family member — an option not as readily available with leasing.

“Hand-me-downs are a big deal,” he said.

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