It’s finally happened. The wireless industry has gone off contract – well, almost. In August, Verizon and Sprint announced that they would stop offering subsidized phones with two-year service contracts to new customers. Under the no-contract model, customers will either pay for their devices via monthly installments or select a leasing option. T-Mobile was the pioneer in eliminating service contracts over two years ago, and it has taken the other carriers that much time to develop and test out their own no-contract models. Of the US Big Four, AT&T is the one carrier that has yet to eliminate two-year service contracts altogether. However, AT&T has been gradually moving toward a no-contract model over the past year, hyping its Next installment program in marketing efforts and phasing out contracts at a number of its retail and local dealer locations. One of the more interesting outcomes of this movement away from service contracts is the emergence of a true device leasing model.

How device leasing works

You might think of any device installment plan or two-year contract with an upgrade cycle as a kind of leasing program, since the customer ultimately trades in the old device for a new one once the device is paid off, or their contract is up. According to Mintel research, on average, consumers upgrade to a new phone every 23 months. So, although not bound by a leasing agreement, ownership of a phone tends to be only temporary and the device goes back to a provider when the consumer is ready for a new one, similar to a lease.

What Sprint has been offering over the past year, however, is a true device lease, in which the customer pays a monthly fee to rent his phone for 24 months. The advantage of Sprint Lease over Sprint’s 24-month device installment option, called Easy Pay, is that the monthly lease payment is lower (sometimes much lower) than the monthly installment payment to own a device outright.

Incentives drive consumers to lease

76% of US consumers who own cell phones agree that new cell phones are too expensive

The fact that consumers have been more readily adopting the lease option over Sprint Easy Pay hardly seems surprising. First, the monthly cost savings is an obvious motivator. Mintel research found about three-quarters of consumers agree that new phones are too expensive. Second, we live in a culture that increasingly looks to lease, rent, or trade goods, rather than purchase them for permanent ownership. The Mintel trend “Why Buy” can be observed globally and across many industries. For example, our research shows that 57% of UK consumers say they sometimes or always borrow things instead of buying them. In the video industry, Mintel reports that 52% of US consumers say they live in a household that subscribes to a movie rental service, and half of them subscribe instead of buying or renting movies. Of new car buyers who finance, more than 25% opt for a leasing program. Sites like Rehash and Swapstyle, which allow users to swap and trade clothing and other household items online, got a boost during the recession, introducing more consumers to the idea of getting new things without spending money.

T-Mobile’s JUMP early upgrade program, announced in early 2014, straddles the line between lease and equipment installments. The entire intent of JUMP is to allow customers who want cutting edge technology to trade in their phones for the latest and greatest devices as soon as possible. So, if an individual enrolls in JUMP, she pays her monthly device installment fee, plus $10/month for the option to upgrade once 50% of her device is paid off. This option moves closer to a leasing option because the intent is never to fully pay off and thereby own the device, and the customer is paying a monthly fee for the option to return the phone early and choose a new one. Only recently, when T-Mobile launched JUMP On Demand, could we see T-Mobile offering a true lease. JUMP On Demand allows customers to pay $0 upfront and then pay to use the phone on an 18-month lease. This option also allows customers to upgrade up to three times per year without paying penalties or upfront fees at each of those upgrades (although the monthly leasing fee may vary, depending on the device).

What we think

Since consumers are now faced with either paying the full price of a device or spending less to lease it, we are likely to see the number of consumers opting for leases skyrocket. Sprint has seen a steady increase in customers choosing a lease option since it began promoting the option, and over half of its customers who purchased a new phone in Q2 chose a lease option. Leasing options allow carriers to offer price competition on devices, in lieu of a subsidized, on-contract phone. Already, T-Mobile and Sprint are offering low monthly price points on their competing iPhone lease offers.

Consumers who choose to purchase a device in full rather than lease it, may feel more enticed to hold onto their phones much longer, since they will be faced with a whole new cycle of device payments should they choose to upgrade. We saw the length of phone replacement cycles decrease from 25 months in 2014 to 23 months in 2015. However, without contracts and with 87% of consumers reporting they are satisfied with their current phone, we could see a reversal in replacement cycle length. If enough consumers opt for device installments, it would likely accelerate the decline of the smartphone in the U.S. (China saw a decline in smartphones for the first time last quarter). The threat of this happening could offer even greater incentive for all carriers to offer a leasing model.

 

Emily Groch is Mintel Comperemedia’s Director of Insights, Telecommunications. She provides omni-channel marketing analysis and competitive insights to wireless, TV, internet, over-the-top, and home security service providers across the U.S. and Canada.

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