Subsidies, contracts and how the upgrade plans of T-Mobile JUMP!, AT&T Next and Verizon Edge add up

Just last week, we fired up the Cray supercomputers and crunched the numbers of T-Mobile’s new upgrade program called JUMP! Since then, AT&T made its announcement about a similar equipment upgrade plan called AT&T Next. Shortly thereafter, we learned about Verizon working on yet another upgrade program called Verizon Edge.

We should provide you with a caveat, there is some disagreement even amongst us, your humble writers, as to the role that equipment subsidies play in the business model and rate plans, so we have gone to great lengths to compare a number of scenarios.

The issue of subsidies and their role in rate plans will be discussed in the conclusion of this article. For these comparisons, we contrast the upgrade plans as they have been presented by the carriers. Then, we will even the markers up and look at costs if you upgrade equipment at the same interval. We also examine how things line up when you add carrier service plans to the picture. As usual, we are not incorporating taxes because they vary by location.

Unlike the variety in our initial numbers crunch with T-Mobile’s JUMP!, we are only going to address the “preferred” pricing model (that is, what is on their web-site, sans contingencies for bad credit) from T-Mobile. We will also compare costs of two models, the Samsung Galaxy S4 and Apple iPhone with 64GB of storage, two flagship devices with distinctly different price points, plus we picked a lower-priced smart device that might retail in the $400 range (like a Nexus 4). Since lower end devices are not as pervasive across all carriers, the examples will not be a price-point match, but will be relevant to those that are thinking about those devices.

We are also going to look at what it costs if you cancel service with these plans versus being on a regular two-year contract (if applicable). It should make for a very interesting comparison.  Let's turn the page and see what happens.

T-Mobile’s JUMP! and Verizon Edge allow for upgrades as often as every six months and they are fairly simple, though how you reach the upgrade threshold is quite different. AT&T Next is geared around an annual upgrade and is also not overly complicated.

First, we will look at the plans themselves in simple terms using the aforementioned hardware as our basis for comparison.

HOW DO JUMP!, VERIZON EDGE
AND AT&T NEXT ADD UP?

1. AT&T Next divides the retail price of the equipment into 20-monthly installments, upgrade requires 12 payments, there is no six-month upgrade provision.
2. For JUMP!, the payment is $10 per month which provides total equipment coverage against damage, and theft. For Verizon Next, 50% of the retail price of the device must be paid in order to upgrade.
3. Assumes upgrading to same device or device with same price point.

As you can see, each carrier takes their piece of the pie in significantly different ways. AT&T Next takes more money out of your pocket before you can upgrade since it breaks down the equipment cost into 20 equal payments versus 24 like Verizon and T-Mobile.  Verizon’s plan allows for an upgrade at six months, but you have to pay down what is owed on the device is 50% or less than the initial retail value, despite that, Verizon Edge is very competitive with JUMP!  With Verizon Edge, if you choose to upgrade annually, this is achieved automatically no matter which device you pick by simply making your payments. JUMP! from T-Mobile fits very well in the mix in terms of equipment financing plans, but as you will see from looking at the out of pocket expenses, it is not the least expensive option if you upgrade your equipment twice a year.

Now, we are going to look at how costs for equipment line up if you were to cancel the arrangement early.  This accounts for two-year contracts (where applicable) as well as the new upgrade plans.  JUMP! works seemlessly with T-Mobile's EIP, the unpaid balance for the equipment is due if you cancel your service before you have paid off the handset.  The same arrangement is true for Verizon Edge and AT&T Next, and since they are all geared off the full retail price of the equipment, you might think that none of those numbers will surprise anyone, but it is easy to forget that extra $10 per month that T-Mobile requires to participate in JUMP!.

UPGRADE COSTS VERSUS TWO-YEAR PLANS IF YOU CANCEL EARLY

1. Remember that $10 out of the monthly payment goes to JUMP!, and is not part of the EIP, given those payments together, if you cancel early, you end up with out-of-pocket expenses that are higher than retail for the equipment itself.

This is not really a level comparison, but for those that are not sure they will be able to stay with a particular carrier for a long time it is worth taking note. If upgrading your equipment is secondary to out-of-pocket expense, the subsidized options do indeed shine, even if you had to cut the relationship short for some reason. Another factor to consider is that retail prices are moveable goal posts. When we compiled the costs of JUMP! just last week, the listed retail price of a Samsung Galaxy S4 on T-Mobile’s website was only $579.99. Now it lists for $629.99. That is not to say the same thing does not happen with subsidized prices. When you factor in real-life variables about whether someone realistically thinks they will be able to stay with a specific provider for a set period of time, T-Mobile has removed itself from being an appealing option in that instance (which is not a bad business decision).

Another factor about JUMP! is that if you cancel early, the final out-of-pocket expense is higher, and it gets even higher if you were to cancel at say twelve months instead of six because of the required $10 monthly equipment coverage.  We are not disputing the value proposition of protecting equipment that is ultimately going to be traded in, but if you canceled at twelve months, your total out of pocket expense for any device is going to be $120 more than retail.  If you upgrade every six months, add another down payment to the bottom line. 

For purposes of this comparison, AT&T does show some value with its subsidized plan because its initial ETF is $325, reduced $10 per month of service.  Verizon starts at $350, reduced $10 per month as well.  Those terms work well in favor of your pocketbook versus full retail prices.

Now we can get to subsidies and the rate plan debate. After unveiling AT&T Next, T-Mobile’s CEO John Legere, a man who is generally frank and to the point, cited that AT&T was charging you twice for equipment. Once for the payment plan, then some baked in price that was part of the rate plan. However, it is a bit of a misnomer to claim that rate plans are all about subsidies because they are not.

Mr. Legere and T-Mobile have been very effective at delivering the “un-carrier” branding with a new rate structure and Equipment Installment Payments for devices, effectively separating the equipment from rate plan so to speak.

WHAT IS THE STORY WITH SUBSIDIES?

It is a common belief that in the US, rate plans are structured with equipment subsidy recovery dollars incorporated into them. The common number thrown around is $20 per month per plan. However, you will not find definitive data anywhere that points directly at a set dollar amount of monthly recurring revenue that is set-aside solely for equipment subsidies. It is really just a fancy word for higher overall overhead and margins in their respective rate plans. There is more than the equipment subsidy involved in the cost of acquiring or retaining a customer. Yes, the model allows the carrier to recoup the expense of buying the equipment and selling it at a loss on contract (subsidy), but it also covers fixed overhead costs (lights, cell towers, power, people) and hopefully make a profit which we can all agree gets reinvested heavily into the carrier’s infrastructure.

However, subsidies are not a means to an end in themselves. Subsidies have been around since wireless started going main-stream decades ago.  Some of our readership is young enough to not know that once upon a time, pretty much every phone was free with service. That T-Mobile has lower priced rate plans is an economic mandate of having the smallest physical network out of the four major carriers in the US and having been struggling to keep subscribers. It simply cannot command the same rates that AT&T and Verizon do, but know this - if it could, it would.

For the sake of argument, we put together a comparison which pits the three upgrade plans against each other, incorporating an assumption that $20 per month of the monthly recurring revenue is geared toward the subsidized cost of the phone. In this case, the upgrade is calculated every 12 months.  For the remaining series of comparisons, we use the Samsung Galaxy S4.

EQUIPMENT COSTS BASED ON ASSUMED SUBSIDIES


We then compared options based on subsidized equipment cost in conjunction with a single line smarthphone plan offered by each carrier, without adding any other options (though we will note differences where appropriate), and contrast that with these new equipment payment plans using the upgrade where allowed.

We chose middle-of-the-road plans from each carrier, for T-Mobile, that mean the Simple Choice Plan with 2GB of data which is $60 per month. On Verizon, that is the Share Everything with 2GB of data which is $100 per month, and on AT&T it is the unlimited minutes with 3GB of data which comes to $99.99 per month (without unlimited text messaging for another $20).

UPGRADE COSTS INCLUDING CARRIER RATE PLANS

1. Combined equipment installment payment, plus any applicable fees associated with the upgrade plan.
2. The cumulative cost of service, installment payments and upgrade fees at six months and one year as allowed by JUMP! and Verizon Edge.
   

Adding AT&T's unlimited text option would have added an additional $240 per year.

We then compared these three upgrade plans on a level playing field, upgrading annually, accounting only the equipment charges.  Annual upgrades used to be a common occurrence.  While they are customer friendly, they are not very healthy to the carrier's bottom line.  Before you go on a rant about "greedy corporations," remember that those profits allow them to sell you the latest gear, keep rate plans in check and if you have a retirement account, odds are you are invested in them anyway.

UPGRADE COSTS IF YOU UPGRADE ANNUALLY


Verizon Edge shines through with very competitive numbers, but then again, T-Mobile's JUMP! also includes full equipment protection against damage, loss and theft.  That is an option on Verizon and AT&T plans and naturally they cost extra.  Incorporating those costs bring Verizon Edge and AT&T Next more-or-less to parity with JUMP!

What can we draw from all this? Well, it reaffirms that T-Mobile is a great all around option for those on a budget, and it is even more affordable if you choose to upgrade only once per year.  However, that is not telling you anything you did not already know. The other not-so-subtle nuances still come into consideration, choices in hardware, and coverage being the two most obvious options a customer must pay attention to. On a pure comparison of equipment cost as outlined in these plans, Verizon Edge is the least expensive of the bunch. AT&T Next is not a bargain in that it builds a 12 month upgrade cycle on a 20 month payment plan, effectively making you pay more for the equipment before allowing you to upgrade. T-Mobile’s JUMP! is well rounded and brings a lot of value to the game because of the equipment coverage that is part of the plan.

When you buy your equipment through a carrier, it has already paid its negotiated wholesale price to the manufacturer. That money is gone regardless of if you buy the device or not. A case and point is the recent report about Verizon being on the hook to OEMs for a cool $45 billion (mostly to Apple) in purchase agreements. Sprint acknowledged that it paid 40% more for its iPhone stock than its competitors. In fact, entering into its agreement with Apple, Sprint spent all its cash to do the deal and floated an additional $7 billion in debt. Despite that, Sprint’s rates did not go up even though its de-facto subsidies were much higher.

So why the disparity in service plan pricing? It is a simpler explanation than equations for subsidies for equipment. It is that and overhead, coverage and marketing. Verizon and AT&T have about 65% of the wireless market in the US, and pretty much 100% of the profits. They are also the only two major carriers that have managed to continuously grow its subscriber base over the past 10 years.  They have larger (and older) networks.  AT&T has had its share of network issues courtesy of demands from iPhone users back when it was an exclusive device. Now, it looks like AT&T is starting to get its act together and is building its LTE network at a rapid clip. Verizon has reinvested its profits and masterfully built out its LTE network, completing the process ahead of schedule. Sprint and T-Mobile have been stagnant on the subscriber front. Pretty much the only way to attract customers is through pricing (because frankly, T-Mobile cannot compete with Verizon with its network alone).

The number 3 and 4 carriers in the US have fresh infusions of cash and talent thanks to recent mergers and acquisitions to hopefully change the landscape of the market. T-Mobile is having a huge impact with its “un-carrier” branding, and it deserves credit for starting what will certainly be a trend for mobile equipment across the industry. T-Mobile’s (and the other carriers’) margin on equipment (not to mention accessories) is definitely higher than it is on its network. That is a big deal, because T-Mobile has launched a model that virtually guarantees it (and other carriers) will receive full retail for the equipment it sells, no matter what.