AT&T Offers Contract-Free Phone Service

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AT&T Inc. (NYSE:T) is giving customers the option to pay for data services without a long-term service contract in exchange for paying full price on smartphones and tablets. This new service, called AT&T Next, is meant to stave off losses that carriers regularly face when subsidizing expensive handsets, reports Dow Jones Business News.

AT&T Offers Contract-Free Phone Service

Under this plan smartphones would be paid for in installments added to the cost of the customer’s monthly bill, and there would be no binding commitment outside of these financing costs. Customers have the option of switching to a different service provider at any time, though they would be expected to pay off the balance for their phone.

Under this plan phones would be paid off after 20 monthly payments, but they would also have the option of upgrading to a new device after one year. The customer would simply turn in their old phone and start again from the beginning, effectively paying a fraction of the total cost of the original phone.

This plan runs counter to the industry model that has been standard in the US and most of Europe since mobile phones hit the mainstream. Carriers have covered the cost of the phones in order to bring in new customers, and made the money back through service contracts and fees. But as smartphone prices continue to rise, manufacturers have benefited from this model far more than service providers. Carriers have been spending upwards of $400 per phone to attract people to their service, and it has become common for carriers to post slow growth or even losses in quarters where they sell a high volume of smartphones.

Since 72 percent of AT&T Inc. (NYSE:T)’s contract customers use smartphones, losses from the subsidy model can only be expected to continue.

AT&T follows in T-Mobiles footprints

AT&T Inc. (NYSE:T) Next is similar to the program that T-Mobile USA, Inc. (TMUS) has been marketing recently, playing on people’s frustration with binding contracts and stealing customers from its larger competitors. AT&T hopes to copy this success, lowering its own fees and passing the blame for rising phone prices to Apple Inc. (NASDAQ:AAPL), Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), and other manufacturers who are actually responsible for setting prices in the first place.

If this model becomes the new normal, consumers can expect to see renewed competition among carriers who would need to compete for customers on a month-by-month basis. Manufacturers may also be more accountable or the price of their phones once customers are forced to pay the full directly, instead of having the prices passed on to them through opaque fees.

The program will be available to new customers and existing customers eligible for a phone upgrade as of July 26.

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