Doing the Math - AT&T Next (April 2014)

A while back, I wrote an article detailing the terms of the Verizon Edge program and comparing it to the traditional subsidized phone purchase with a 2-year service contract. Based on the page views, it has been popular (by this blog's standards), so I thought I'd do a similar one for AT&T's Next program.

The next three paragraphs are a slightly-modified excerpt from that original article which explain the basics of these programs and why they came to be:

In the early days of wireless service in the US, consumers paid relatively small or zero initial costs for their phones in exchange for a service contract (normally 24 months). In effect, the carrier subsidized consumers' initial purchases and factored that cost into their monthly service plans; over 24 months, the carrier made enough profit from a customer's service plan charges to offset the loss of the initial phone purchase. As basic phones became cheaper and cheaper to manufacture, consumers who continued using them were (and are) able to continue to enter into 24-month contracts while paying no money up front for their phones. Since the retail cost is of these relatively simple devices is probably only $150-250 (with the true cost to the carrier being lower), it is easily recouped by service plan profits over the life of the contract.

However, as smartphones became more prevalent in the wireless marketplace, it became harder and harder for carriers to accumulate what they considered adequate profit from a heavily subsidized smartphone purchase. The retail, non-contract price for some of these smartphones can be nearly $800, and subsidizing these rising costs required carriers to either raise service plan prices or cut their costs. As anyone who has paid attention to wireless plans in the last few years can tell, most carriers have chosen to raise additional revenue, mostly by changing their data options. Whether instituting hard data caps or limiting speed after a certain amount of data usage per month, these moves are all ways to make more money from users who utilize large amounts of data, either by charging higher plan prices or overage fees. Even with these changes, smartphone users can still expect to pay up to $300 for a newly-released device up front.

Under the AT&T Next program, the advertised promise is you don't pay anything for your phone on the purchase date. Instead, you effectively take out an interest-free, short-term loan from AT&T for the full MSRP value of your phone and pay it back in monthly installments in addition to your service plan charges. This allows consumers to get a new device and pay over time as opposed to having to come up with a portion of the cost of the phone at purchase. In addition, under the Next program, AT&T says you can upgrade as often as every 12 months. So what's the catch?

Upgrade Timing

Before you need to worry about the prices and other terms, it's worth mentioning you have to meet certain requirements to be eligible for the program. You are eligible if:

• You are a new AT&T Wireless customer.
• You are a current AT&T Wireless customer in good standing and eligible for an upgrade.
• If you are a current AT&T Wireless customer in good standing with a service contract, but not currently eligible for an upgrade, your eligibility depends on the start date of your contract:
• If you started your current 2-year AT&T Wireless service contract on or before January 18th, 2014, you will be eligible 5 months and 1 day after your contract start date (earliest possible date is June 19th, 2014).
• If you started your current 2-year AT&T Wireless service contract on or after January 19th, 2014, you will be eligible 19 months and 1 day after your contract start date (earliest possible date is August 20th, 2015).

The upgrade cycle for AT&T's Next program is actually a little simpler than Verizon's Edge: with the latter, their flagship offer is a very short cycle, but in the small print, there is a stipulation saying you have to pay off 50% of the original price of your phone to be eligible for your next upgrade. If you make the normal payments, you won't reach that 50% level for about a year, and you can't make pay extra each month unless you immediately pay up to 50%. As a result, while you technically can get the mystical 6-month upgrade cycle they prominently advertised when the program was launched, it will cost you quite a bit out of pocket in addition to the increased monthly bill.

AT&T has decided to eschew such complexities and offer two upgrade cycles, one of which must be chosen at the time of purchase. I can find no accelerated pay-down options or other ways to decrease your time to upgrade outside of simply paying off the remaining loan. Of course, if you cancel your wireless service before your phone is fully paid off, you owe the outstanding balance. Here are your options:

• AT&T Next 12: 20 monthly payments for payoff and a trade-in option after 12 payments.
• AT&T Next 18: 26 monthly payments for payoff and a trade-in option after 18 payments.

As expected, they're branded with the lower upgrade cycle number as opposed to the payoff time. Basically, you can pay more each month and be eligible for an upgrade sooner or have a lower monthly payment and wait another 6 months for the upgrade. With a short upgrade cycle being one of the major features of these programs, it's worth noting the Next 18 plan only allows you to upgrade 6 months before a traditional 2-year service contract. We'll see if it's worth it.

Constants

Although I will reference Verizon's Edge program fairly regularly, there are no prices here to compare them. This article is meant to inform those who have decided to sign up with AT&T and are looking at the merits of the Next program, not those who are trying to decide between AT&T and Verizon. Because I only want to highlight the pros and cons of the Next program, keep the following in mind:

• I will not be factoring in other specials/offers which are applicable to all AT&T customers.
• I will not be factoring in insurance or other optional feature costs.
• I will not be factoring in sale or trade-in values of current devices.
• I will assume you are in good standing and have good enough credit to qualify for the program with no down payment.
• I will assume upgrades will be done as soon as possible within the respective cycles. For 2-year calculations, I assume phones chosen during an upgrade in that timeframe will have the same monthly payment as the original phone.
• I will assume all phones are well-maintained and fulfill the criteria for trade-in.

One of the differences between this article and the Edge one is I will be factoring sales tax into the calculations. I decided to do this since you end up paying sales tax on the full retain price of the phone up front with the Next program whereas you only pay tax for the initial subsidized price with the traditional plan. I used 7% as the sales tax since it's close to the national average.

Plan Discounts

While AT&T decided to keep things relatively simple with the upgrade cycles, they did decide to dangle a different carrot for customers to attract them to the Next program: discounts on service, specifically their Mobile Share Value plans. You will be eligible for discounts on these plans under the following scenarios:

• You choose to participate in the Next program.
• You are in a traditional 2-year service contract featuring 6GB or less of data started prior to March 9th, 2014, and switch to a comparable Mobile Share Value Plan.
• You are in a traditional 2-year service contract featuring 10GB or more of data started prior to February 2nd, 2014, and switch to a comparable Mobile Share Value Plan.
• You purchase your phone at full retail price.
• You bring your own device in to be activated.
• You have fulfilled your 2-year contract and continue service.

You probably read that lengthy list and thought, "Wow, who isn't eligible for these discounts?" The answer: anyone entering into a traditional 2-year contract after March 9th, 2014. In other words, AT&T is creating one more disincentive for traditional subsidized plans on top of large initial payments and $36 per line activation/upgrade fees.

Here are the discounts:

• $15/month per line on plans with up to 6GB of data. This means the final price of each smartphone line would be $25/month.
• $25/month per line on plans with 10GB or more of data. This means the final price of each smartphone line would be $15/month.

Overall Cost - General

While there are obviously too many scenarios for me to cover in this article, Next is pretty obviously targeting those who want the latest and greatest (though not as aggressively as Edge). As a result, I'm going to run the numbers for what I consider the flagship phones for each operating system right now and one budget phone. These are the ones I've chosen:

• HTC One M8
• Apple iPhone 5s 32GB
• Nokia Lumia 1520
• Motorola Moto X

Granted, because of the relatively high costs associated with each phone, the net extra cost per device is probably going to be larger than if you got something cheaper, but again, Next is marketed at those who want new stuff, which is usually the most expensive. It's unfortunate the iPhone is so old, but that's just how the timing worked out. If Next is anything like Edge, the numbers scale the same way regardless of OS/manufacturer, so when it is released, it will probably look much the same as the more expensive phones listed here.

For each scenario, I will list the equipment and services chosen, then compare the 2-year costs of the traditional service contract and the Next program.

24-Month Cost - Individual

Equipment/Plan

• 1 smartphone (HTC One M8)
• 2GB data

Traditional Plan

• Initial cost: $249.99
• HTC One M8: $199.99
• Sales tax: $14
• Upgrade fee: $36
• Monthly cost: $80
• 1x smartphone line fee: $40
• 2GB data: $40
• 1 phone for the duration of the plan
• 24-month cost: $2,191.99

Next 12 Plan

• Initial cost: $44.80
• Sales tax: $44.80
• Monthly cost: $97
• 1x smartphone line fee: $40
• 2GB data: $25 (after discount)
• HTC One M8 Next 12 fee: $32
• 2 phones over the duration of the plan
• Phone 1 for months 1-12
• Phone 2 for months 13-24
• 24-month cost: $2,372.80

Next 18 Plan

• Initial cost: $44.80
• Sales tax: $44.80
• Monthly cost: $89.62
• 1x smartphone line fee: $40
• 2GB data: $25 (after discount)
• HTC One M8 Next 18 fee: $24.62
• 2 phones over the duration of the plan
• Phone 1 for months 1-18
• Phone 2 for months 18-24 (and beyond)
• 24-month cost: $2,195.68

Using the traditional 2-year contract with 2GB of data as the baseline, you would end up paying $180.81 more over 24 months with the Next 12 plan and $3.69 more for the Next 18 with the options above. Again, in the real world, there are additional costs like service taxes and insurance/warranties, but we are simply comparing the base cost of the Next program to a traditional subsidized plan.

To be honest, I'm pretty surprised: this is a significantly smaller gap than the Verizon Edge program with similar devices/features last year (the difference for one individual scenario was over $400). The worst offender of the chosen devices was the iPhone 5s: it was $235.51 and $27.91 more expensive with the Next 12 and Next 18 plans, respectively. The Moto X was $112.00 and $1.12 more on those plans, but while the Lumia 1520 was $132.96 more on the Next 12 plan, it was actually $29.04 cheaper on the Next 18 plan. So with that specific phone, you can upgrade 6 months earlier and save $30 when compared to a normal 2-year service contract. Interesting.

24-Month Cost - Couple
Equipment/Plan

• 2 smartphones
• HTC One M8
• iPhone 5s 32GB
• 4GB data

Traditional Plan

• Initial cost: $606.98
• HTC One M8: $199.99
• iPhone 5s: $299.99
• HTC One M8 sales tax $14
• iPhone 5s sales tax: $21
• Upgrade fees: $72
• Monthly cost: $150
• 2x smartphone line fee: $80
• 4GB data: $70
• 1 phone per person for the duration of the plan
• 24-month cost: $4,206.98

Next 12 Plan

• Initial cost: $97.30
• HTC One M8 sales tax: $44.80
• iPhone 5s sales tax: $52.50
• Monthly cost: $184.50
• 2x smartphone line fee: $50 (after discount)
• 4GB data: $70
• HTC One M8 Next 12 fee: $32
• iPhone 5s Next 12 fee: $32.50
• 2 phones per person over the duration of the plan
• Phone 1 for months 1-12
• Phone 2 for months 13-24
• 24-month cost: $4,525.30

Next 18 Plan

• Initial cost: $97.30
• HTC One M8 sales tax: $44.80
• iPhone 5s sales tax: $52.50
• Monthly cost: $169.62
• 2x smartphone line fee: $50 (after discount)
• 4GB data: $70
• HTC One M8 Next 18 fee: $24.62
• iPhone 5s Next 18 fee: $25
• 2 phones per person over the duration of the plan
• Phone 1 for months 1-18
• Phone 2 for months 18-24 (and beyond)
• 24-month cost: $4,168.18

With more devices, the cost difference between the service contract and the Next 12 plan widens to $318.82, but the Next 18 plan again comes in cheaper than the service contract by $38.80. Those monthly discounts on line fees with the Next program shrink the monthly difference drastically and are basically acting as a subsidy.

It's worth noting that going up to a 10GB Mobile Share Value Plan would have allowed this concocted couple to get over twice as much data for only $10 more per month because of the increased discounts at that level, but this exercise is about comparing apples and oranges, so I stuck with 4GB of data. This is simply a reminder to always look around for special deals/combinations which might net you a better value if you're actually looking for a plan to buy.

24-Month Cost - Family

Equipment/Plan

• 4 smartphones
• HTC One M8
• iPhone 5s 32GB
• Moto X
• Lumia 1520 16GB
• 10GB data

Traditional Plan

• Initial cost: $946.46
• HTC One M8: $199.99
• iPhone 5s: $299.99
• Moto X: $49.99
• Lumia 1520: $199.99
• Total sales tax: $52.50
• Upgrade fees: $144
• Monthly cost: $260
• 4x smartphone line fee: $160
• 10GB data: $100
• 1 phone per person for the duration of the plan
• 24-month cost: $7,186.46

Next 12 Plan

• Initial cost: $166.25
• Total sales tax: $166.25
• Monthly cost: $278.75
• 4x smartphone line fee: $60 (after discount)
• 10GB data: $100
• HTC One M8 Next 12 fee: $32
• iPhone 5s Next 12 fee: $37.50
• Moto X Next 12 fee: $20
• Lumia 1520 Next 12 fee: $29.25
• 2 phones per person over the duration of the plan
• Phone 1 for months 1-12
• Phone 2 for months 13-24
• 24-month cost: $6,856.25

Next 18 Plan

• Initial cost: $166.25
• Total sales tax: $166.25
• Monthly cost: $251.35
• 4x smartphone line fee: $60 (after discount)
• 10GB data: $100
• HTC One M8 Next 1 fee: $24.62
• iPhone 5s Next 18 fee: $28.85
• Moto X Next 18 fee: $15.38
• Lumia 1520 Next 18 fee: $22.50
• 2 phones per person over the duration of the plan
• Phone 1 for months 1-18
• Phone 2 for months 18-24 (and beyond)
• 24-month cost: $6,198.65

You are reading that correctly, and yes, I double-checked the spreadsheet/test carts on the AT&T website. For the scenario above, the Next 12 plan saves you $330.21 compared to the service contract, and the Next 18 plan comes in a whopping $987.81 less. There are a few different factors which contribute to this:

• The monthly smartphone per-line discount for a plan with 10GB or more of data is $25, meaning each line only costs $15 per month. With four lines, this represents $40/month in savings over the Next 12 plan and $100/month in savings over line fees with the service contract.
• The monthly fees for the Next 18 plan in this scenario are actually less than the ones for the service contract (the Moto X is only $30.38 with both Next and line fees).
• The initial cost for the service contract is nearly $950, while you walk out of the store only paying about $170 with the Next plans. That's a $780 gap, and while it narrows over time with the Next 12 plan, it only widens with the Next 18 plan.

Conclusions

Should you go out and sign up for Next? As always, it depends, and you should always run the numbers for your specific situation; this article is just a comparison of relatively simple scenarios.

If you are an individual or couple who can afford a larger initial payment and are mainly concerned with saving money, the Next 12 plan probably isn't for you since you'll end up spending anywhere from one hundred to a few hundred dollars extra over two years. However, if you don't mind a slightly higher monthly payment and want to upgrade in 18 months as opposed to 24, the Next 18 plan represents basically the same cost over two years as the traditional service contract. If you must have a new phone as soon as possible on AT&T without purchasing it retail, the Next 12 is for you. If you simply can't afford the initial costs of a traditional service contract, but still want a smartphone, I would recommend the Next 18 plan as long as you qualify.

If you are managing a plan which requires at least 10GB of data per month, Next is probably exactly what you need. With its heavily-discounted line charges at high data levels, fair-enough (Next 12) to pretty-reasonable (Next 18) monthly fees, and much lower initial costs, it will likely end up saving you at least some money, and depending on the type/number of devices, it could end up saving you a bundle over a two-year period.

Something I neglected to highlight that was brought up in the comments: all of this assumes you are starting from scratch with no current devices. In the real world, if you currently have a phone, you can get at least some cash/credit for it using the myriad of used electronic purchasing businesses or AT&T itself. This means your total cost will be lower than the numbers above, but since you will receive the same amount for your trade whether you go with the service contract or Next program, it will have no net impact on the cost of your first contract/agreement for comparison purposes.

However, if you choose to upgrade as soon as possible with the Next program, you will never pay your phone off, so you will never receive any future trade-in value for it. Remember you'll never pay full retail for it since you'll trade it in before the loan is paid off, but you will still pay more than the initial cost of the service contract option. However, discounts received on your data plan will offset that additional cost to varying degrees depending on your plan and phone. If you stay with a service contract, you will get that trade-in value for each upgrade, but will likely still have an initial net cost each time if you choose a similar phone. You will also have waited an additional 6 to 12 months to upgrade compared to the Next plans, which is a real deciding factor for some people. Net cost of this factor varies widely by device and which trade-in/sale path is taken, so I won't factor it into my example scenarios, but I encourage you to consider it in your decision.

These types of programs made sense when carriers were making more money from them, but why would they roll them out if they actually lose money compared to the service contract model? Here are my guesses:

Customers are happier with newer phones, and Next makes it easier to get them.
With the pace of mobile phone technology, having a device older than a year or two probably means it's slow and you're missing quite a few features which are standard in newer models. This is the price of progress and isn't really anyone's fault, but customers will likely blame either the phone manufacturer or the carrier. By making high-end devices accessible to more customers and decreasing the upgrade cycle timeline, the Next program theoretically improves customers' everyday device experience and views of the carrier.

Businesses prefer recurring revenue streams as opposed to one-time payments. 
I work for a fairly large IT company, and our focus in the last five years has been transitioning from a traditional on-site model (people buy our software at muli-year intervals and install them at their location) to a hosted model (people pay us a monthly or yearly fee to access an instance of our software hosted on our systems). This is happening everywhere in the software world, from Microsoft Office 365 to Quickbooks Online. The Next program represents AT&T transitioning to a recurring revenue model on phones instead of a traditional retail sale model or the heavily-subsidized model adopted they've used until this point. The main positives of recurring revenue are your numbers are more consistent/easier to forecast and customers are more likely to stay with you when the renewal process is easier.

Refurbished phones are a big business.
In the early days of mobile phones when initial costs were very low, there wasn't much demand/need for refurbished phones outside of those who damaged a device and needed a replacement mid-contract. With the much higher initial costs of many smartphones today, the significant number of users who want to avoid a new contract to keep their grandfathered plan, and users who want a smartphone for cheaper than retail, there is a huge market for refurbished phones. For AT&T, the profit margin on these devices is usually much higher than a new device because trade-in payments are relatively low while resale prices are only slightly less than retail new, and in the case of the Next program, there are no trade-in payments at all. It significantly decreases the average upgrade time, so AT&T receives a higher volume of fairly current devices which it can refurbish and sell again for a tidy profit.

It makes high-margin phones more attractive to customers.
The monthly Next price of a phone is based on the MSRP of the device. As anyone who has bought a new vehicle or purchased something from Amazon can tell you, the MSRP of durable goods is normally significantly higher than the actual market price. In my personal retail experience, the more expensive/higher-end items also normally have a higher profit margin. The Next program lowers the initial cost barrier to these high-end phones, allowing more customers to purchase them and earning AT&T more money per device. A higher margin means even if customers trade the phones in before fully paying the loan, there's decent chance they will have already paid off the actual cost, and then AT&T can turn around and sell it as a refurbished unit for an even larger profit.