Analyst: Almost half of Q4 smartphone sales will be financed

According to new predictions from Ben Schachter at Macquarie Research, around 43 percent of all smartphones sold by the end of this year will be paid for through handset financing plans and not through traditional wireless carrier subsidies.

The prediction from Macquarie Research, highlighted in a new Business Insider article, is underscored with research by Consumer Intelligence Research Partners. CIRP found that fully 25 percent of all smartphones sold in the first quarter are being paid for through handset financing plans, a figure that it up from just over 15 percent in the fourth quarter.

Indeed, the popularity of handset financing plans in the wireless industry is not being lost on the wider business world. For example, Amazon (NASDAQ: AMZN) is now advertising to some of its customers its own interest-free financing plan for its Kindle devices. Under the plans, Amazon customers for example can purchase the Kindle Fire HD in four monthly installments of $27.80. "At checkout, we'll charge 20% of the device price, plus any applicable tax and shipping charges in full. The remaining balance will be automatically billed to your credit card in four equal installments every 30 days," Amazon said.

The drive toward financing plans kicked off last year when T-Mobile US (NYSE:TMUS) overhauled its pricing plans to separate the cost of its service from the cost of its devices. The rest of the nation's top carriers have since followed suit, though they continue to offer subsidized plans as well.

Indeed, in the first quarter Credit Suisse pointed out that roughly 40 percent of AT&T's (NYSE: T) new subscribers opted for the carrier's handset financing option. That figure was closer to 15 percent for Verizon Wireless (NYSE: VZ)--but Verizon said that number could double in the coming months as it expands its handset financing offer to indirect sales channels.

Although handset financing represents a significant change to the way wireless carriers sell smartphones, carrier executives have widely said that the change from subsidies to financing won't dramatically affect their bottom line. Essentially, handset financing programs like AT&T's Next and Verizon's Edge move the cost of the phone from a carrier's service revenues to its equipment revenues--an accounting change but not a material one. Indeed, Verizon CFO Fran Shammo noted during the carrier's first quarter earnings conference call that the carrier's Edge program "had a favorable effect on profitability," according to a Seeking Alpha transcript of the event.

However, some analysts have painted a decidedly cloudy picture on the shift to handset financing. "Our analysis shows that migrating a subscriber from a VZ subsidized plan to an unsubsidized Edge plan destroys about $800 of customer lifetime value (LTV), or about 16% of LTV," wrote New Street Research analysts shortly after the release of Verizon's first quarter earnings results. "However, keeping a sub at a lower value is better than losing a sub altogether. As such, VZ cannot afford to ignore the segment of customer that values early upgrades and no contracts."

And what of the effects of handset financing on users? CIRP noted that an average consumer would pay roughly $1,059 over the course of a year for a subsidized phone with a two-year contract, while that same consumer would pay roughly $1,133 for the same phone and service through a financing program.

Separately, an analysis from Re/code found that AT&T provides the least expensive financing program when full, yearly costs are calculated, while Verizon provides the most expensive plan. However, the publication pointed out that the Tier 1 carriers provide slightly different offerings--for example, Sprint's (NYSE: S) plan includes unlimited data.

For more:
- see this Business Insider article
- see this Re/code article
- see this Amazon page

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