iPhone Change May Be How You'll Pay

Dow Jones Newswires

When Apple unveils its next iPhone on Wednesday, the biggest update may be in how most consumers will pay for the device.

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The new phone isn't expected to include many major changes, but the days of the $200 upfront payment for the latest model are mostly over. Consumers now have a dizzying array of options for getting the new device, even if they aren't thinking about switching wireless carriers.

Sprint and T-Mobile US have leasing plans that can run as low as $15 a month. Verizon recently stopped offering contract plans to new customers and expects that about 60% of its smartphone sales in the third quarter will be on installment purchase plans, up from 18% in the second quarter of 2014. AT&T Inc. sold 68% of its iPhones on installment plans for the three months ended June 30.

Customers who have contracts and don't want to switch carriers generally can still upgrade their iPhone for $200 at AT&T, Sprint or Verizon. T-Mobile doesn't offer contracts at all. But installment plans and leasing options will be upfront in the marketing around Apple's newest device this fall.

The carriers advertise the installment plans as money-saving, but the differences can be small. At AT&T, for instance, a 24-month installment plan for a single smartphone with 5 gigabytes of data a month costs about $2,448. With a two-year contract plan, the cost of that phone with data is about $2,359, not including taxes and fees.

The new pricing options come as the big carriers are competing for subscribers in a mature U.S. market with little growth as most people have a cellphone, switch carriers rather infrequently, and are waiting longer to upgrade their existing smartphones. The average upgrade time in the U.S. has risen from 18.2 months in 2010 to an estimated 26.3 months in 2015, according to data from telecom consultant Chetan Sharma.

Installment plans create a "transparency in value" that is making people hold on to devices longer, T-Mobile Chief Financial Officer Braxton Carter said at an industry conference in May, whereas old contract plans made it hard to determine the actual cost of the device. "And devices are very, very expensive," he said.

While carriers have changed the structure of how they sell the iPhone, the total cost of the device, typically $650 for the base model of the latest version, hasn't changed. To convince customers to upgrade or lure them from rivals, carriers keep upfront phone prices relatively low.

"The whole idea is to play around with making things look cheap today," said Jean-Pierre H. Dubé, a marketing professor at University of Chicago's Booth School of Business who has researched pricing.

"Consumers just aren't very good at anticipating the future cost," he said. "Either they don't think of about it, or it is too complicated to calculate or they are just excited by what looks like a low price."

The wireless carriers have traditionally competed with each other in three areas: network quality, pricing and device selection. But now the carriers all offer the same major handsets and generally have wide coverage using high-speed LTE networks. And network claims can fall empty, as the quality of a network can depend on region or even the building.

T-Mobile has shown that you don't have to have the top network to win customers, Mr. Sharma said. The carrier has gone from shedding millions of customers a year to rapid growth by using aggressive marketing and pricing.

Since the beginning of 2014, T-Mobile has added more than 7 million mainstream connections, putting it just slightly behind Verizon's growth and outpacing AT&T by almost 3 million, according to UBS. Sprint lost connections in that period.

"We have learned if you have an OK network, pricing trumps quality," Mr. Sharma said. "Network still matters, but pricing is the No. 1 criterion that people look toward."

The price competition in recent years has focused on monthly service rates--particularly the cost of wireless data--but device promotions have come into play as well. Last year, all four major carriers had promotions around the iPhone launch, a contrast to the days when carriers discouraged upgrades. A typical new installment plan charges $27 a month for two years to finance a $650 iPhone--about equal to the base price of the phone--but the monthly service bill is lower than an equivalent contract plan.

Sprint and T-Mobile also offer leasing, which requires customers to return the phone at the end of the term or make a final payment to own it. Under a current promotion, Sprint lets customers lease a base model iPhone for $15 a month for 22 months when they trade in an old phone.

Verizon still offers traditional contracts to customers who want to renew them. AT&T will let any customer sign a new contract by calling the company, or by signing up online and in company-owned retail stores in most areas.

Under the subsidy model, most Verizon customers upgraded their phones every three years even though they were eligible after two, said Fran Shammo, Verizon's chief financial officer. With installment plans, those customers have an even greater incentive to hang onto phones for three years or longer, he said. "Consumers who walk in really don't pay too much attention to the price of the handset," he said, "because they know they're going to pay an installment."

Write to Thomas Gryta at thomas.gryta@wsj.com and Ryan Knutson at ryan.knutson@wsj.com