Last month we saw the major US carriers introduce a range of new device plans. The plans seemed to offer consumers the ability to upgrade to newer phones much more often, all for a low fee and a lot of legal footnotes and disclaimers.

T-Mobile kicked this off. As the smallest of the national carriers, they are the most able to take risks. Put another way, they need change the most. Under their plan, consumers can buy a new phone at a subsidized price every month if they pay an extra $10 a month. That plan includes an insurance policy and a few other nice add-ons. The other carriers followed suit announcing or leaking ostensibly similar plans.

Suffice it to say that none of them are really that good a deal for consumers. It is notable that investors did not see this as a positive catalyst for handset makers and their suppliers. The stock market’s interpretation is that these new plans are not going to lead to massive waves of new phone purchases. If you build a handset model in Excel (and we have), you will find that one of the most sensitive model drivers for phone volumes is the rate at which consumers upgrade. On average, Americans buy a new phone every 1.8 years, essentially when their contract expires plus a little bit for lost phones.  If you changed 1.8 to 0.5 (i.e. every six months) you would come close to quadrupling phone shipments, adding another China to the global market. Investors do not see anything like this happening.

So what is going on here?

First, the plans are really not that good a deal. Upgrading a phone is not as cheap as it may appear, and the extra fees are a turn-off for many consumers. T-Mobile’s plan has some appeal, AT&T’s does not.

In essence, the carriers are up against a hard reality. They have gotten handset consumers accustomed to the idea of buying subsidized phones.  Subsidy rates have been growing steadily for years, despite all the carriers’ public protestations that this cannot go on. And as we explored a few months back, the benefits of subsidies are pretty substantial for the carriers.  They lock in consumers. Subsidies are just a function of customer acquisition cost. Cheaper than TV advertising, and more effective than coupons. That being said, the cost of the subsidies are a significant capital expense for the carriers. The math works out to something like 100 million subscribers per year at $150 each, or $15 billion.

These new upgrade plans do not fundamentally alter that math. For the carriers, at best they attach higher monthly fee (a higher ARPU) to any increase in subsidy. T-Mobile’s inclusion of insurance is a nice touch because the insurance business can be very lucrative for them once your read through all the fineprint. AT&T’s plan can be interpreted as a much higher ARPU in exchange for a relatively less subsidized phone.

Our impression is that the carriers have really just bought themselves an insurance policy. T-Mobile suffered for years because it did not carry the iPhone. The carriers are all now worried that one of their competitors will get access to the next ‘hit’ phone and drive churn off of everyone else’s network. These plans will help the carriers lock in the early adopter customers most likely to switch networks for a new device.

We do not see this as answer to the carriers’ subsidy burden. The wireless operators still need to solve that problem, and increasing the upgrade path for a small number of their customers will not accomplish that. But at this point, their options are limited, we are far down the path of subsidy addiction.

One option would be for the carriers to stop subsidizing phones. T-Mobile has done this because they cannot afford to subsidize the iPhone, but no one else has followed suit. It appears the next step will be an attempt to change pricing plans as with these new examples. But we already know this will not work, the carriers long ago stopped offering discounted monthly plans for un-subsidized phones. That just leads to churn, and is better left to the prepaid segment of the market.

Perhaps the only option left to them is to partner with outside parties to offload some of the subsidy cost and credit risk. If the carriers can find a way to do this, without shutting off subsidies or breaking their links with the consumers, they will free up a considerable portion of their balance sheets.

We have a few ideas as to how they may accomplish this. Drop us a line if you would like to brainstorm.