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iPhone worth wars are again as carriers compete for 5G prospects

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The Apple iPhone 12 Pro Max will be presented during a virtual product launch.

Daniel Acker | Bloomberg | Getty Images

The price Americans pay for an iPhone 12 depends on which cellular service they want to use it with. The three US airlines are actively competing for subscribers by discounting the new iPhone, which hits stores next week, in hopes of attracting customers to their cellular service for years to come.

It starts with a discount of $ 30. For those on AT&T, T-Mobile, or Verizon service, an iPhone 12 costs $ 799 before taxes and other fees. If you want one to be unlocked without activating it on a carrier, it costs $ 829.

Customers can get even bigger discounts on the new devices when they're ready to make monthly payments for the next several years, when they get unlimited data plans, and when they trade in their old phone. For example, AT&T customers can get as much as possible $ 800 off an iPhone 12, which covers almost the entire cost of the device.

"This is the biggest promotion we've ever seen on an iPhone launch day. It beats the $ 650 deals made by all carriers in 2016 and the $ 700 deals Verizon made to new subscribers last year," wrote LightShed analysts Walter Piecyk and Joe Galone this week, saying it heralded the return of the "fat subsidy".

Verizon and T-Mobile also have competing promotions.

For Apple, the wave of carrier promotions could increase iPhone sales in the US by lowering the cost of a new phone. They could also help shorten the upgrade cycle for Apple smartphones by encouraging users to upgrade to a new phone sooner. According to Apple, the typical life cycle of an iPhone is three years today, and the company sets its new releases accordingly, with a fairly extensive redesign that is interspersed with minor updates every three years.

For wireless carriers, iPhone promotions provide an opportunity to prop up existing subscribers and potentially attract new ones in hopes of covering the cost of the devices across multi-year payment plans.

The new iPhones also support 5G networks, which are still being set up in the USA. With customers tied to 30 month commitments, some users won't be able to switch if one carrier's network suddenly looks better than the other two.

"We believe Verizon is likely looking at this as a way to move customers to higher-tariff plans and ensure that the mmWave spectrum provided is being used," Rod Hall, an analyst at Goldman Sachs, wrote this week. "We have long expected US carriers to help grow Apple 5G revenue, although we feel the economic appeal outside of the US is less clear given the lack of mmWave deployment."

Slight differences

All carrier promotions in the US have two things in common: customers have to trade in an old device of some value – a phone from the last few years that isn't broken – and they have to commit to monthly payments.

However, they differ in how they target new customers and how the mechanics of the deals work. The best deal for a given user depends on their current provider.

This is how they break down:

AT&T advertising applies to both new and existing customers. To get a free iPhone 12, AT&T must be traded in, and the customer must activate it for an unlimited plan that costs at least $ 65 per month for one person. AT & T's installment payment plan lasts 30 months. Piecyk estimates that AT&T is subsidizing new and existing customers with around $ 800. T-Mobile offers up to $ 850 credit on iPhone 12 models that are spread over 30 payments. Users need to sign up for the T-Mobile service and trade with an old device. The amount of the discount is directly linked to the value of the trade-in. It also has deals for customers who buy multiple iPhones at the same time. However, the best deals are reserved for new subscribers, with lower discounts for existing Sprint or T-Mobile subscribers. Verizon is offering a free iPhone 12 to new customers, but they'll need to trade in an old phone and sign up for an unlimited data plan that costs at least $ 80 a month for one person and stays at it for 24 months. Existing customers can get an iPhone 12 for $ 15 per month with one trade-in. Piecyk estimates that Verizon is effectively offering a grant of $ 800 to new customers.

Back to the good old days

The wave of competing discounts from the three US carriers is practically a return to carrier subsidies, which were a major factor in the US smartphone market in the early years.

A decade ago, a new iPhone was often $ 199, because that's how much it cost when users bought it from a carrier on a two-year contract, usually with a heavy early cancellation fee. These contracts also held a large number of consumers in a two-year smartphone upgrade cycle.

In 2013, carriers started to let smartphone contracts expire. This has shown many consumers that the upfront price for a premium smartphone is $ 700 or more, and allows them to cancel at no great cost.

Over the past few years, carriers have restored the same customer loyalty using device payment plans. Customers don't have to pay hundreds of dollars upfront for a new iPhone or Samsung Galaxy, instead they must commit to paying between $ 30 and $ 50 per month for at least two years with a flat rate if they cancel early.

Carriers have found ways to attract new customers with promotions tied to their device upgrade plans, often by overvaluing a trade-in device. However, over the past two years, aggressive promotions have become less common and competing airlines often disagreed with them.

Now that 5G is a major growth cycle for the telecommunications industry, the three carriers are working to steal customers from their competitors or keep them locked with the 5G iPhone for the next two years.

Meanwhile, Apple has improved its own device upgrade installment plans in a number of ways, despite not offering any subsidies like the carriers do. People with the Goldman Sachs Apple Card can buy an iPhone and pay for 24 months without interest.

Apple also has an upgrade program that combines an iPhone that is paid for in monthly installments with an extended warranty, doesn't tie users to a single carrier, and allows them to upgrade to the latest iPhone after a year.

"One of the things we do is try to make it easier and easier for people to get involved with this type of monthly funding," Apple CEO Tim Cook said last December.

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Katherine Clark