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AT&T is veering away from subsidized phones, and it's paying off

Brad Molen

The wireless industry in the United States is in the midst of some rather significant changes. Ever since T-Mobile implemented its Jump program early last year, the carrier has turned subscriber loss into massive gains. The company's success is rubbing off, too. AT&T's Next program is very similar to Jump, which lets customers pay off their phones in monthly installments and become eligible for upgrades earlier, and is just one example of a major transformation taking place throughout the industry.

According to AT&T's earnings report, the company saw more than 1 million Next sales, which accounted for 15 percent of all smartphones sold in the quarter. AT&T CFO John Stephens elaborated in today's investor call, saying that Next accounted for 20 percent of total sales in December alone. This doesn't sound like much right now, but the big picture shows a different story. Next is actually growing at an incredibly fast pace, and it's unlikely that AT&T will change course anytime soon.

At present, 1.5 million subscribers have signed onto Next. Again, this is a small number compared to the company's total customer base (there are now 110 million subscribers, with nearly 73 million of those being postpaid), but what's interesting is how quickly that number has grown. According to the numbers, 1 million people signed onto Next just in the past quarter; this means that only 500,000 subscribers -- one-third of its current total -- were activated in the three months following its July launch.

The fourth quarter is a huge one thanks to holiday sales, but AT&T is quite optimistic that this is the way forward for the company. In today's investor call, Stephens said the market is embracing these kinds of plans, and AT&T customers are loving it. "You have to be aggressive in the marketplace and have your ear to the ground to what the consumer wants," Stephens said.

That's talking the talk, but AT&T is showing that it can walk the walk. Last week, the company announced that any postpaid subscriber currently on a standard two-year contract will be able to switch to Next and upgrade to a new phone once they're six months into their commitment. In August, the carrier lowered Next device prices to compete with Verizon's Edge plans; and last month, it added more pricing options and offered monthly discounts to anyone who is signed up for the service.

There's a reason why AT&T wants its customers to switch plans: The old-school contract model is just not working out as well as it once did.

There's a reason why AT&T wants its customers to switch plans: The old-school contract model is just not working out as well as it once did. At a December investor conference, CEO Randall Stephenson noted that subsidy plans are unsustainable. Stephenson noted: "As you approach 90 percent [smartphone] penetration, you move into maintenance mode. That means more device upgrades. And the model has to change. You can't afford to subsidize devices like that."

This wasn't the first time a wireless executive has made this observation, and it likely won't be the last. Carriers are always interested in finding new ways of making money, and as the vast majority of consumers embrace smartphone use in the US, it's simply going to be tougher for them to bring in the revenues they're used to enjoying. According to Stephenson, plans like Next and bring-your-own-device (in which you pay less per month if you don't have a subsidy) are more sustainable over time.

Not only is Next quickly catching on with AT&T customers, it's also exactly what the company wants -- and it's going to get even more aggressive about it. This year, expect to see a lot more drive from the company to accelerate Next adoption. Change is happening in this once-stale industry, and the transformation is coming a lot faster than we think.

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