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Two-year contract is dead, but AT&T revives unlimited data

The start of 2016 is being marked by the disappearance of several names we might have expected to be with us forever – not just Motorola handsets and Alcatel, but the two-year contract. Sprint and AT&T have joined Verizon and T-Mobile in ending these deals, and the same is happening in many other countries, as operators finally end their love-hate affair with subsidies.

Tying a user into a contract in return for a device which was perceived to be ‘cheap’ or ‘free’ upfront was an important way to drive mobile adoption in the early days of the industry, and again when smartphones were entering the market. But subsidies also hit carriers’ profitability and cashflow, and customers became frustrated by the two-year lock-in, in a world where Apple was refreshing its line-up every year.

Early attempts to end subsidies, notably in Spain, were rocky affairs, but the device industry knew it had to change, as growth shifted to markets where subsidies were not the norm, as in India, or were even illegal. New approaches to financing were introduced by the manufacturers and, in time, by operators like T-Mobile USA, making the old-style contract unattractive.

Sprint has withdrawn subsidies for smartphones (though not for tablets), with CFO Tarek Robbiati highlighting the carrier’s new leasing program. He told investors this was a “churn killer”, because it enables Sprint to re-engage with subscribers once the lease period is complete, as well as to generate revenue from refurbished products.

“It is apparent to the market now that we are eliminating subsidies moving forward, which is in line with the rest of the industry,” he said.

TMO was the frontrunner in the US, ending contracts as part of its ‘UnCarrier’ initiative in 2013 and offering a series of new pricing options to encourage uptake and gain market share. Verizon discontinued most contracts in August, though it will offer them to existing customers who still want them. AT&T followed suit last week.

Most MNOs are now switching to equipment installation and leasing plans to keep users tied to their networks, though customers gain the flexibility to pay off the balance of their device cost at any time without early termination fees, if they wish to swap provider.

AT&T, however, appeared to be resurrecting another pricing approach which had been presumed dead – the unlimited data deal. It will now offer smartphone customers all-you-can-eat voice, text and data for $100 a month for the first line and $40 a month for each additional line (with a fourth one for free). This does not see the carrier leaping too rashly back into the unlimited tariffs which weighed so heavily on network capacity and profits a few years ago – it will only offer this Unlimited Plan to subscribers to its DirecTV or U-Verse TV services. That highlights the importance of the quad play to its strategy – it said that the unlimited plan would be “the first of many integrated video and mobility offers the company plans to announce in 2016”.

“We think the plans may help AT&T return to competitiveness at the high end of the wireless market and help the company take back share from Sprint and TMUS; however, we believe there is also a risk to Verizon, whose high end data offerings now seem even more lackluster when compared to their largest competitor,” said analysts at New Street Research in a client note.

Verizon is now the only national US carrier without an unlimited data option – Sprint clung to its, taking advantage of its hefty spectrum capacity to support this differentiator, while TMO has introduced unlimited data options in some categories as part of Uncarrier. However, both operators have made their unlimited choices more expensive in recent months.

AT&T’s approach is effectively using its TV division to subsidize unlimited mobile data – something it once hoped to achieve through sponsored data deals with third party brands, a plan that did not take off.

With its new offering, it can target three main groups. Firstly there are the 15m homes which have DirecTV, many of which do not currently use AT&T wireless for mobile. Given that the average US home has 2.8 mobile subs the addressable market is about 42m mobile subscribers, about 28m of those likely to be non-AT&T users, given its 33% mobile share.

Secondly there are about 21m homes that have AT&T mobile services but not DirecTV, which are being offered the TV package for $19.99 a month. Thirdly there are homes with neither, which may be lured by the prospect of a bundle, combining the two with the unlimited data thrown in. AT&T believes the offer will attract defections from rivals as well as combating its own churn. It is sweetening its appeal to rivals by offering $500 in credits towards a new smartphone for people switching to the AT&T Unlimited Plan with an eligible trade-in smartphone. Who said phone subsidies were dead?

The degree of success depends of course on the price, and at $100 a month plus the TV subscription, it is not that cheap and AT&T may have missed its target. However, for families it is more attractive, at $180 for four lines, especially where there is significant demand for viewing outside the home.

It will be interesting to see if other big multiplay operators follow suit. AT&T has the advantage not just of being a pay-TV operator in a country with a huge base of potential mobile subscribers to poach from rivals, but also now owning rights to premium content. That means in theory that it can extract enough revenue from the content to pay for the unlimited data.

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