AT&T's business model: why your mobile bill keeps going up

AT&T's business model: why your mobile bill keeps going up

Summary: Do mobile carriers want to sell you a phone? Only if you're a heavy data user, what the industry calls a "high-quality integrated device subscriber." And if you want to get accepted into that club, be prepared to pay.

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TOPICS: Mobility, Telcos, AT&T
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In my latest post on the Windows Phone 7 update brouhaha, I wrote one paragraph that I thought was perfectly uncontroversial:

Carriers don’t want to sell you a new phone. They want you to pay them a monthly bill, preferably a big one with a full data plan and a bunch of add-on services. New phones cost them money, in the form of subsidies they pay the handset maker in exchange for getting you to agree to a two-year contract to pay that big monthly bill. You pay off that subsidy over the life of your contract. When the contract is up, your carrier is perfectly happy if you keep paying the big bill.

I have now received a handful of e-mails and comments, most of them anonymous or using fake return addresses, from people telling me they think that my belief is "clueless" and "stupid" or that they heard someone else say that.

Well, the anonymity makes it impossible to continue the discussion directly. And playing the "stupid and clueless" card as part of your opening statement is not exactly a conventional debate tactic.

But I think the discussion is worth having, so let me add a few nuggets of good solid evidence for my argument. Mobile carriers want to ratchet up your bill by getting you to use high-margin data services. And that's not just my opinion; it's right there in published documents from one of the world's biggest carriers, AT&T.

AT&T is Microsoft's most prominent partner for Windows Phone devices in the United States so far, and the company has an exclusive partnership with Apple in the U.S. AT&T moves a lot of product for a lot of handset makers. This official statement from June 2009, part of AT&T's iPhone 3GS Frequently Asked Questions document, is refreshingly candid. I've boldfaced the interesting sections:

AT&T, like most U.S. carriers, offers a variety of phones that we sell below our actual cost when customers agree to sign service agreements. In general, the more a customer spends with us, the quicker they become eligible for a price break on a new device. For example, iPhone customers who spend more than $99 a month per line with us generally are eligible for an upgrade between 12 and 18 months into their contract. [emphasis added]

They sell the phone for below cost. The difference between the price you pay and the price they pay is a subsidy. They guarantee that they'll collect that subsidy by charging you an early termination fee if you try to back out of your contract before it officially ends. And you can't get a new subsidized phone until you've worked off the subsidy on your current phone. (In practice, few people pay the ETF. AT&T says their churn rate, or the percentage of customers leaving for other providers, was 1.32% in the most recent quarter, and it was even lower for the smartphone category.)

A little later in the same document, they cover the case of customers who still have a year left on their two-year contract:

Q. What about customers who bought in July, August, or September 2008 but don't spend over $99 a month?

A. We value the business of all our customers. Getting a new subsidized device is based on several factors including monthly recurring charges and having an account in good financial standing. In general, the more you spend with us, the less time you have to wait to get another device. This is a very fair system. That said, we do offer early upgrade pricing only for iPhone for those customers who don't want to wait. [emphasis added]

You can find similar evidence if you look in AT&T's financial statements, which talk about the value of "high-quality integrated device subscribers." Those are what the fast-food industry calls "heavy users." In this case, they love you if you spend over $99 per month and use lots of data. They love you today even if you're using an iPhone 3G whose contract has expired.

In the just-ended third quarter, AT&T reported "record integrated device sales," including, one would imagine, many iPhones of the 3GS and 4 persuasions. Again, I've boldfaced the interesting part

More than 8 million postpaid integrated devices were activated in the third quarter, the most quarterly activations ever. More than 80 percent of postpaid sales were integrated devices. (Integrated devices are handsets with QWERTY or virtual keyboards in addition to voice functionality and are a key driver of wireless data usage.) [emphasis added]

A little later in the report, under the heading "Wireless Margins," the company notes that activating all those new integrated devices resulted in "increased operating costs." However, the report notes that "growth in the company’s high-quality integrated device subscribers helped partially offset these costs." In other words, they have more people spending $99 per month or more per device.

Those specific statements are from AT&T, but you can apply the basic business model to every successful modern carrier. Update: In its just-concluded Q3 2010 financial results, Verizon bragged that its average revenue per user (ARPU) for data services was up 19.0% over the past year. The ARPU overall was up a mere 1.8%. As that example makes clear, getting you to pay for more data is where the carriers see financial growth. (And as an aside, it's going to get worse as carriers try to steer people into data plans with bandwidth limits, just as mobile media is beginning to take off. Keep an eye on that discussion in future financial statements from these companies.)

To repeat: Carriers don't care about the phone, except to the extent it allows you to use more of their services. They care about your bill, which is based on how much you use that phone. So, if you and I buy the same subsidized smartphone today, what will happen a year or 18 months from now? That depends. If you're a cheapskate on the bare-minimum data plan, you're not going to be offered an early upgrade discount. But if you've signed up for the top-of-the-line unlimited voice and data and text package, you'll probably get offered a special deal to upgrade.

This is why I'm still unconvinced by the argument that carriers will decide to block Microsoft from delivering updates to some devices. Every single current-generation Windows Phone being sold is an integrated device capable of using gobs of data. If you've got one of those devices, AT&T and its fellow carriers want you to use it more, not less.

Update: In the Talkback section, Orcmid makes an astute observation:

I also think that Microsoft is going to help with those products, and it is going to help by the superb quality of consistent service that every WP7 user will be able to call upon. As I unwrap my HD7, I see it in how Amazon Cellular is able to support discounts and the initial experience consistently for all of the Windows Phones it sells. I can see how this frees the carriers from having to provide increased support for the flexibility (and possible mess-ups) that users of expanded services may require, since so much of it can be in the common on-line support and buddy support that is growing around the WP7, from first-time users to developers.

This may be different than developers-developers-developers (but maybe not), but Microsoft as providing a consistent experience and an integration gateway between devices, applications, users and now carriers may have even better magic than what was accomplished in making the PC safe and appealing for users, manufacturers, and developers.

That didn't dawn on me until I started scrutinizing the purchase, delivery, and open-the-box experience of my HD7 acquisition. It will be interesting to watch.

That ties in very neatly with a conversation I had with a senior Microsoft executive back in June, before the first developer models of the Windows Phone had been released. This statement makes more sense in retrospect:

One of the important changes is who we think of as our customer. Previously, you could argue that we thought about the mobile handset and the operator and eventually the customer. Our primary customer now is the person using the phone.

There's no question in my mind that Microsoft is trying to remove that layer of friction by relieving carriers of the significant headaches of updates and support. Time will tell whether customers notice.

Topics: Mobility, Telcos, AT&T

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Talkback

55 comments
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  • The carriers are selling billing plans and they welcome MSFT

    Here's my theory, from doing some work with alternative long-distance carriers too many years ago. The product of the service providers is your bill. Yes there is a network, there is capital investment, but the product is the billing plan. I completely support Ed's take on this.

    I also think that Microsoft is going to help with those products, and it is going to help by the superb quality of consistent service that every WP7 user will be able to call upon. As I unwrap my HD7, I see it in how Amazon Cellular is able to support discounts and the initial experience consistently for all of the Windows Phones it sells. I can see how this frees the carriers from having to provide increased support for the flexibility (and possible mess-ups) that users of expanded services may require, since so much of it can be in the common on-line support and buddy support that is growing around the WP7, from first-time users to developers.

    This may be different than developers-developers-developers (but maybe not), but Microsoft as providing a consistent experience and an integration gateway between devices, applications, users and now carriers may have even better magic than what was accomplished in making the PC safe and appealing for users, manufacturers, and developers.

    That didn't dawn on me until I started scrutinizing the purchase, delivery, and open-the-box experience of my HD7 acquisition. It will be interesting to watch.

    [And I continue to think that it was brilliant to go worldwide after GSM devices first.]
    orcmid
  • Is this a joke?

    I find it very strange that anyone would contest what Ed is saying, he shouldn't have to prove his statements because they are fact (or so I was under the impression they were). Do people honestly believe that carriers sell phones at cheaper prices than retail "just because" and that carriers don't want you to have big bills? Those ideas simply aren't true, cellular carriers are businesses, after all.<br><br>Ed, thank you for your response but I am not sure you should have even bothered (no offense). Anyone who is ignorant enough to contest this sort of common knowledge is clearly unscathed by facts and logic.<br><br>If I'm missing the point I apologize, but honestly I hope I am. I was a bit shocked by the fact that you would have to argue this point at all.
    ABR2195
    • Apparently some guy with a podcast keeps saying this

      That's all I know. ;)
      Ed Bott
      • How disappointing

        @Ed Bott
        The stupidity the internet is capable of fostering is truly amazing, I would be interested in finding this podcast to see what other incredibly valuable insights the person hosting it has to offer.

        Although I will hand it to you Ed, you blog never fails to impress in my eyes.
        ABR2195
      • RE: AT&T's business model: why your mobile bill keeps going up

        @Ed Bott When the trilateral commission reconvenes he'll be all over that as well.

        On the logical next step seems the carriers have to be thinking about what happens when a decent quality dual-mode phone is available they have to compete on service and price - basically disintermediated pipe services. I think this will be very good for consumers as competition, if left to true market forces, will drive prices lower and quality/speeds up.
        Wolf_Lodge
      • RE: AT&T's business model: why your mobile bill keeps going up

        @Ed Bott While I agree with your premise that maintaining a current user in his current phone with a data plan makes the most financial sense for the carrier. For some reason that same carrier is in no rush to support that money making phone with updates. They just don't seem to be interested in providing the updates except for Apple products which for some reason seem to get a pass from all the carriers. I believe that is the reason for the difference between what the "Podcaster" is saying and what I percieve to be a reasonable economic analysis.

        I do listen to the podcaster I believe you are refering to and both of you make good points. I keep relatively informed about the status of updates on WP7 and AT&T (even as the premier partner), seems to drag their feet on each one. This is especially troubling since MS more or less sucessfully does a lot of the testing for the carrier. Yet I have not seen any indication that the gen 1 windows phones are going to get the updates soon. Not to mention discussion on Tango or Appolo being applied to gen 1 devices (of course that is the OEMs choice as well).
        xds9mm
  • If I am not mistaken,

    isn't what the Telcos do called Socialism? Spreading the costs evenly among subscribers and non-subscribers to fully offset their costs and the costs of certain high-usage customers. It seems to work for them....they seem not to ever have a problem balancing their budgets. Just saying...
    Jared Neale
    • You are mistaken.

      @Jared Neale

      Look up 'socialism' in a dictionary.

      What the telcos are doing is called 'capitalism.'
      msalzberg
    • What msalzberg said

      but let me help you. You see, the cell phone provider has to PERSUADE you to GIVE them your money. They do this by offering GOODS, SERVICES, and INCENTIVES (like a price break on a new phone). That's CAPITALISM and its core tenet is your individual FREEDOM to do with your MONEY as YOU see fit.

      Now, in socialism, the STATE decides when you have too much money, and TAKES it from you by FORCE. The STATE then takes YOUR money and gives it to people the STATE deems more worthy than you to have it, in order to create a DEPENDENT class of people perpetually OBLIGATED to the STATE. This is SOCIALISM and is the ANTITHESIS of FREEDOM.

      Got it?
      frgough
  • In one aspect, the do want to sell you a new phone.

    I agree, they want you to continue to pay the same bill after your penalty phase expires, no question. That said, they do want to sell you a phone and will push for one because they love predictability. Few break their contracts, it is a guaranteed and accountable revenue stream. This allows them to predict and plan expenditures more readily.

    Specifically, it reduces churn when you lock/entice a customer to commit. The more prepaid or pay as you go customers you have, the harder it is to predict revenue.

    TripleII
    TripleII-21189418044173169409978279405827
    • Right

      @TripleII A free agent is a telco's worst nightmare. That's why they start sending the incentives for contract extensions a little before your contract expires, or well before in the case of oe of those high-value customers.
      Ed Bott
      • Some people just HAVE to complain.

        @Ed Bott
        If you were rich and simply gave out 100 $100 bills to 100 random people, 90 would be happy, 3 would be suspicious, and 7 would complain with reason's varying from begin offended "Do I look like I NEED your charity" to "You are evil because you didn't give it to a registered charity". :D

        TripleII
        TripleII-21189418044173169409978279405827
      • RE: AT&T's business model: why your mobile bill keeps going up

        @Ed Bott
        Too true.
        One of the four lines on my plan is data and once my "time" was up, they have been sending "offers" like crazy...

        chuckle
        rhonin
  • RE: AT&T's business model: why your mobile bill keeps going up

    Note also that after we reach the end of the 2 year contract (was 1 year for my first two phones), they do not reduce your monthly bill. The part of the charge that was for paying off the subsidy now goes straight to the bottom line.

    Do they want you to buy a new phone after you get to the off-contract state? Yes for sure if the new phone will drive you to a higher-cost plan; yes anyhow if they think you might be intested in someone else's phone.

    At least the ETF now declines a bit over the life of the contract. That's a new feature...about a year ago one of the carriers did that as a competitive talking point and the FCC told the industry what a good idea it was. (I'm not sure whether the commission mandated or suggested strongly.)

    And then the ETF escalated by $75 to $100 at the start.

    If you're buying a juicy enough phone plus contract from a new carrier, some of the carriers will pay your ETF on the old carrier for you. I'm guessing that doesn't apply to third party stores. I'm guessing Verizon--if the alleged Verizon iPhone is real sometime--will do that a few months after they start carrying the mythical Verizon iPhone. (Not right away--they'll get plenty of jumpers early on.)
    John Baxter
  • RE: AT&T's business model: why your mobile bill keeps going up

    Along these lines, I'm curious as to whether AT&T will create a middle tier price for iPhone users who want to jump to Windows Phone before having "earned" the full new-device subsidy. (I skipped iPhone 3G, so I didn't have to use that tier...and I had decided to pay for a no-contract 3Gs if I did jump.)
    John Baxter
    • RE: AT&T's business model: why your mobile bill keeps going up

      @John Baxter
      Depends on the contract and what plan you are currently on.
      For both the 3GS and i4, ATT offered me full discount to upgrade to any smartphone at the 1yr mark. It was integrated into the iphone offer.

      FOr a smartphone, it doesn't really pay to buy your own unless you plan on switching. The plan costs the same and you have just paid a lot more for your phone.
      rhonin
      • not entirely true

        not entirely true.(for T-Mobile users at least)
        if you keep your phone for more than 18 month
        and do not plan to change carier.
        you can get a much better plan price if you buy your onwn phone, rather than use subsidised one.

        Example:
        single user plan for 1000 minutes voice
        with phone subsedy(clasic plan) : $65
        no subsedy (Value Plan) : $50


        now phone costs are :
        let say you want Galaxy S3

        plan 1 = $350. + 2year contract
        plan 2 = 600 + no contract

        basic math :
        (65 - 50)*24 = $360 (24 month $15 a month more than value plan)
        360+350 = $710 and you will still be paying that extra $15 a month after the contract is up.

        value plan = $600 upfront but
        600-360 = you will save 110 over 2 years of use
        and will be saving evey moth after that.

        yes $600 is a big chunk of money to fork over at onece but they even help you there
        you can give tham a deposit of 250-300 and pay the rest over next 20 month in $20 a moth payment with no(0% )interest

        sounds good to me.

        no other carier have this kind of program I know of.
        and most other cariers have plans that more expencive to begin with. I think T-mobile is onto somthing here.





        Quote:"FOr a smartphone, it doesn't really pay to buy your own unless you plan on switching. The plan costs the same and you have just paid a lot more for your phone."
        vl1969
  • Why single out AT&T?? Verizon pricing is WORST

    Verizon extra charges are worst than AT&T (not by a lot).

    Singleling out AT&T on this issue is ignoring the abuse by pretty much ALL the carriers.
    wackoae
    • I'm not singling anyone out

      @wackoae I'm using AT&T as an example of the business model. All of the carriers have a similar model.
      Ed Bott
      • In that case why single out a company?

        Using AT&T as an example is simply saying that the others don't have the same issue when in fact they do ... and in some cases are worst.
        wackoae