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  • 10.16.15

The Rise Of Unlocked Smartphones Will Transform The U.S. Wireless Market

Between Apple’s new upgrade program and a wave of cheap unlocked handsets, consumers are about to be enlightened.

The Rise Of Unlocked Smartphones Will Transform The U.S. Wireless Market
[Photo: Flickr user R. Nial Bradshaw]

A few years ago, you’d have been crazy to buy a new phone without your wireless carrier’s blessing.

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At least in the United States, locking yourself into a two-year contract was the tradeoff for a relatively low upfront price. If your carrier didn’t offer the phone you wanted, too bad. The cost of buying an unlocked alternative and popping in your own SIM card was simply too high.

But as U.S. wireless service has shifted away from two-year contracts, unlocked phones have become much more appealing. By forgoing your wireless carrier when buying a new phone, you get more choice, lower prices, and possibly a better overall product than the ones AT&T and Verizon will sell you. And it won’t be long until consumers finally start to realize it.

Doing The Math

The reason unlocked phones make sense now is because the big U.S. wireless carriers have largely abandoned the subsidized smartphone and the two-year contract that goes with it. Instead of spending $200 up front for a new iPhone, you’re charged the actual, nonsubsidized price of $650, with the option to pay in monthly installments. To make up the difference, the cost of wireless service is less than it would be on a contract.

This change can seem insidious when you’re shopping around at a wireless carrier store. Hey, instead of paying $200 for that iPhone right now, pay us in monthly installments of $32.45 per month! It’s better this way!

Improbable as it sounds, this new way of paying for wireless service is likely a better deal.

The iPhone 6s, in its box

Consider AT&T as an example: With a two-year contract, a new iPhone costs $200 up front, plus $40 per month, per line, plus the cost of however much data you’re sharing with everyone on your bill. But without the contract, the monthly cost is just $15 per line for plans with at least 15 GB of shared data. You’re effectively paying $650 for the phone, but saving $25 per month on service. That adds up to a savings of $150 after two years.

Granted, the system is less advantageous for smaller data plans, which have a monthly cost of $25 per line. But if you don’t like how AT&T’s plans are structured, you can always head to Verizon, T-Mobile, or Sprint, all of whom now offer cheaper plans than they did in the subsidy era.

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Why would wireless carriers do this? You can partly thank T-Mobile, which kicked off the trend a couple years ago and triggered a mobile broadband price war. But carriers like the non-subsidy system anyway, because they can use it to push more frequent upgrades, says Brent Iadarola, vice president of mobile and wireless at analyst firm Frost and Sullivan. (All of the major carriers allow customers to trade in their old phones partway through the payment cycle, getting a new phone and starting the cycle anew.)

“As you upgrade from, let’s say a feature phone to a smartphone, or a 3G phone to a 4G phone, statistics show you’re consuming a lot more data, and essentially their business is to sell those data plans and those tiered data plans,” Iadarola says.

Redistribution Of Power

While this shift may have seemed lucrative for carriers at first, Iadarola notes that it could have unintended consequences as phone makers start to sell unlocked devices directly to consumers.

Apple, for instance, just launched a payment program for unlocked iPhones. Starting at $32.41 per month, customers get AppleCare+ coverage and can trade up to a new iPhone annually. It’s ideal for users who always want the latest iPhone with a protection plan, and it allows them to switch wireless carriers at will.

 “The reality is, [unsubsidized plans] probably drove the device manufacturers to move in that direction more rapidly than was expected,” Iadarola says. “And when Apple comes out and announces that, you know there’s going to be a cascading effect with other device manufacturers.”

So far, that hasn’t happened yet, though an unconfirmed report by Fortune recently claimed that Samsung is drawing up its own payment plan.

The OnePlus One

In the meantime, the end of phone subsidies has opened the door to cheaper unlocked phones, provided you’re willing to pay the full price up front. The Alcatel OneTouch Idol 3 and OnePlus One are both excellent examples, selling for $300 or less and being far superior to similarly priced offerings from wireless carriers.

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Saving money isn’t the only advantage of buying an unlocked phone. By avoiding wireless carriers, you might also get a better product. Especially with Android phones, carriers are notorious for preloading them with bloatware and delaying or neglecting software updates for older handsets. Buying directly from a phone maker can alleviate those problems. Just look at the 2014 Moto X, which is just now getting the latest version of Android on the unlocked version that Motorola sells online. Users of the carrier-locked AT&T and Sprint versions won’t be getting the update at all.

As more people see the value in buying unlocked phones, wireless carriers will find that they have less control over customers than they used to. Frost and Sullivan’s Iadarola imagines that eventually, users could easily swap plans and carriers through an app on their phone.

“You’ll see a wide variety of different plans offered from all of the carriers to phones unlocked,” Iadarola says. “Maybe you’re going to be at a certain city through your work on a certain day, and you know this carrier works better, you can select a day pass for that, and when you’re not there, maybe you’re on a monthly program from a different carrier.”

Breaking The Upgrade Cycle

These types of changes won’t happen overnight, as the vast majority of U.S. consumers still buy their phones the traditional way. Frost and Sullivan estimates that unlocked phones account for 5% to 10% of U.S. sales. Steve Cistulli, Alcatel’s senior vice president and general manager for North America, makes an even more conservative estimate of 1% to 2%.

Alcatel’s OneTouch Idol 3

That means there’s a lot of work to be done in teaching people about unlocked phones. But Cistulli thinks big box and online retailers will be eager to take on the job, as they have plenty of incentive to sell unlocked phones.

“It’s about owning the customer even longer, it’s about upselling the accessories that are coming directly to them,” Cistulli says. “So again, it’s really all about shifting where the sale is done, and where the money of the sale is going.”

Alcatel has been preparing for this shift for the past two years. Much of the company’s marketing for the Idol 3 revolves around teaching people about the unlocked phones, answering simple questions such as how users can keep their phone number, and how a SIM card works.

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“There’s a generation–and you can put whatever label you want on the generation, X, Y, Z, millennial, etc.–there’s a generation that is open to be educated. And so education is an important component of this,” Cistulli says. “And again, as we start to shift the distribution to big box retailers and online, you should start seeing a significant amount of education that goes along with that.”

Frost & Sullivan’s Iadarola believes that Apple’s new upgrade programs will benefit the entire market from an education standpoint, and will cause the percentage of unlocked devices in the United States to rise at a significant rate.

“I think there are a lot of attractive components here, and just the fact that Apple’s driving it is going to create a buzz around it,” he says.

About the author

Jared Newman covers apps and technology for Fast Company from his remote outpost in Cincinnati. He also writes for PCWorld and TechHive, and previously wrote for Time.com.

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