AT&T's de la Vega: 2-year contracts will eventually go away

AT&T Mobility (NYSE:T) is making it about as clear as can be: Eventually, it will stop offering two-year contracts and subsidized smartphones.

AT&T Mobility CEO Ralph de la Vega

De la Vega

"I think it is one of those options that is going to go away slowly," AT&T's Ralph de la Vega, CEO of the carrier's Mobile & Business Solutions Group, told Re/code. He said that the change will occur "not because we insist on it but because customers will choose it less often." [click to tweet]

This week AT&T's national retail partners and third-party dealers began moving toward offering just AT&T's Next equipment installment plan option, in which customers do not get a subsidized device, but instead pay off their phones through monthly payments and can upgrade to a new phone earlier. For now, AT&T still offers two-year contracts through its own online sales channels and at its more than 2,000 company-owned retail stores.

AT&T said 65 percent of its postpaid smartphone gross adds in the first quarter came from its AT&T Next plans, up from 58 percent in the fourth quarter. AT&T has said that as of the end of the first quarter, 62 percent, or 35.4 million, of its postpaid smartphone subscribers were on no-device-subsidy Mobile Share Value plans. Those plans typically have discounted service pricing.

Customers typically pay $0 down for devices under Next, though AT&T did just launch a new program that lets customers make a 30 percent down payment on a device and then upgrade to a new phone after 12 monthly payments. Under Next, customers typically pay less up front for a phone than they do under a two-year contract with a subsidized phone, but also must add the monthly phone payment to the cost of their plan. That's why AT&T has been pushing customers to Mobile Share Value shared data plans, which offer discounts for customers who choose Next.

Carriers have embraced EIP programs because it cuts subsidy costs for them and lets them realize more equipment revenue up front, even if the installment plans also have been associated with a drop in service revenue. T-Mobile (NYSE:TMUS) started the trend away from subsidized devices and contracts more than two years ago, in March 2013. In July 2013 T-Mobile unveiled its handset upgrade program, Jump, and less than a week later AT&T unveiled Next.

De la Vega said AT&T was already moving toward the Next launch when T-Mobile announced Jump. "T-Mobile and us came out within weeks of each other," he said. "They got there maybe a week or two ahead."

The AT&T executive told Re/code it is unclear still whether customers will replace their phones more or less often if they are not tied to two-year contracts. "We need to give it a little more time," de la Vega said, speaking on the sidelines of Rutberg's Future:Mobile conference in San Francisco.

In a separate interview with Forbes, de la Vega discussed Google's (NASDAQ: GOOG) Project Fi MVNO, which uses Wi-Fi hotspots for calling and data in addition to cellular connections from Sprint (NYSE: S) and T-Mobile. Currently, the service only works with the high-end, Motorola-made Nexus 6 smartphone. Google announced the service in late April and appears to be experiencing huge demand for the service, as the company said last month it will likely be late July or early August before everyone who requested an invitation will get one.    

For $20 per month plus taxes and fees, the service offers access to around 1 million U.S. Wi-Fi hotspots and unlimited domestic voice and texting, as well as unlimited international texting and low-cost international calling in more than 120 countries. Customers pay an additional $10 per GB for data. Importantly, at the end of the month, Google will credit users for their unused data, so that users only pay for what they use.

The Nexus 6 smartphone normally retails starting at $650. However, there is a limited-time promotion from June 2 to June 23 for customers to purchase a new Nexus 6 for $150 off. The 32 GB model will sell for $499 and the 64 GB model will go for $549, plus applicable taxes. Qualified buyers can pay for the Nexus 6 over 24 months at $20.79/month for the 32 GB model and $22.88/month for the 64 GB model.

"It isn't obvious to us whether this is a noble attempt to have the market do something different or whether they really want to make an investment and have that be one of their core businesses," de La Vega told Forbes. "That's yet to be seen."

Yet de la Vega said he will not underestimate Google. "We are very respectful of what Google does," he said. "They have some very innovative ideas. Whether this concept will have scale, it has yet to be seen."

"We are going to watch what they're doing and see how customers react to it," he added.

For more:
- see this Re/code article 
- see this Forbes article

Related Articles:
Report: Apple stores to sell only unsubsidized AT&T iPhones, will adopt Verizon Edge changes
AT&T offers new Next option requiring 30% down payment up front
Verizon: Edge customers now must pay off smartphone before upgrading, but get to keep old phone
Report: AT&T to abandon 2-year contracts at national retailers and local dealers
Google Project Fi MVNO users may not receive invitations to join the service until July or August

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