How Apple's new iPhone installment plan works
Apple's move to sell its newest iPhones on an installment plan is the latest blow to the smartphone pricing used and frequently reviled by consumers for years: the two-year cellphone contract.
When Apple unveiled its new smartphones Wednesday, it said the iPhone 6S would start at $199 with a new two-year contract and the 6S Plus would cost $299 on contract. That was the simple way to describe it, as for years Americans were accustomed to signing a two-year contract with a wireless carrier in exchange for a discount on the upfront price.
But at the same time, executives introduced installment and leasing plans that acknowledge most telecom carriers are abandoning these contracts tied to deeply discounted phones.
The result is a scenario that sounds a lot like a plan you get from an auto dealer.
By buying directly from Apple, a consumer can pay $27 to $31 a month for 24 months for the iPhone 6S and 6S Plus. At the end of those two years, the consumer would own the phone outright. Cell phone service fees, of course, come on top of that.
iPhone 6S unveiled with slew of new features
Apple also introduced, and is displaying prominently on the Apple.com store, a new iPhone Upgrade program. You can purchase the iPhone 6S on a monthly payment plan starting at $32.41 for the 16GB model or $36.58 for the 16GB 6S Plus (going up by a little over $4 a month if you want more storage).
The pricier plan includes the ability to upgrade to a new iPhone after 12 months. You'd continue to pay the installments on the new phone and would just be “restarting the clock,” having to pay the monthly fee for another two years before you would own the newer phone. In this way, the customer is essentially leasing the phone from Apple.
The iPhone would be sold unlocked in the Upgrade program and can be used with any carrier. And, much like the warranty sold on a car, the monthly payment plan also includes Apple Care+, which would normally cost $129 for a second year. It also includes the ability to replace a broken iPhone at a discount ($99 for up to two incidents).
iPhone 6S's nice features are far from revolutionary
The transition from two-year contracts, and the deep phone discounts tied to them, reflect the maturing of the smartphone market and the pressures facing telecom carriers.
When Apple launched the original iPhone, it was far more expensive than most cellphones used by consumers. It made the steep cost palatable to consumers by linking with a carrier, AT&T, which offered the phone for a more moderate price in exchange for a multi-year contract.
Under this system, a phone that would cost $649 without a contract would cost $199 with one, with the carrier then charging an extra fee on top of service to make up the difference (and a profit) over the next 24 months. So instead of paying $15 a month for service you would be paying $40 in addition to the $199 upfront.
Over the last few years, the carriers have begun getting rid of contracts in favor of monthly payment plans. Carriers say these plans are better for them because they are more accurately reflect the true price of the phones.
All the major national carriers offer monthly payment plans today as they phase out contract options. T-Mobile stopped offering contracts two years ago, while in August, Verizon said it was no longer planning on offering two year contracts. Sprint announced that they would stop offering contracts by the end of the year. Only AT&T has yet to fully renounce contracts.
Verizon ends two-year contracts with new plans
Apple's installment plans are pricier than previous iPhone installment plans offered by carriers, though under those plans the iPhone isn't necessarily sold unlocked and does not benefit from an extra year of warranty protection. AT&T, Verizon, Sprint and T-Mobile have yet to release their new pricing for the phones, though T-Mobile is welcoming Apple's new way to sell phones.
"We love this," says T-Mobile COO Mike Sievert in a statement given to USA TODAY. "Anything that gives customers total choice is a win for them and it is a win for T-Mobile. Unlocked phones give consumers the freedom to try out any carrier. That is a fantastic thing for T-Mobile too."
Consumers may need to wait for more information before they know if Apple's installment plans are a good deal. The carriers have yet to reveal pricing, promotions or trade-in offers for the new iPhones, something they’ve traditionally done in the past and are expected to do again this year.
For Apple, RBC Capital Markets seems encouraged by the payment change. The brokerage firm said it expects the new leasing program to "further accelerate demand and share gains for AAPL given just 27% of the install base has migrated to the iPhone 6 product line as of June-qtr."
iPhone buyers can start using the iPhone Upgrade plan when they pre-order their new iPhones on September 12 or to purchase them on September 25. iPhones bought using Apple's upgrade plan can be pre-ordered online but need to be picked up in a physical Apple Store.
Follow Eli Blumenthal on Twitter @eliblumenthal