AT&T and T-Mobile this week are introducing new, cheaper smartphones and promoting financing plans for low-cost handsets to convince penny-pinching customers to upgrade.
The phones don’t have the latest and greatest cameras, screens, and chips—so they aren’t good for filming 4K videos or connecting to wireless networks at super-fast speeds. But they’re as good or better than the expensive flagship phones of just a few years ago, and are aimed to appeal to people looking for a good deal.
T-Mobile’s new phone, made by Alcatel but branded as the carrier’s and called the Revvl, will cost only $5 monthly, while AT&T is adding LG’s mid-tier K20 model for only $4 per month. Both deals require that customers sign up for frequent upgrade plans, called Next at AT&T and Jump at T-Mobile. On T-Mobile’s plan, a customer can turn in the phone after 18 months for a new model or pay off any remaining balance. AT&T’s plan allows for an upgrade with trade-in after two years or paying off the phone over 30 months.
“Value phones are one of the fastest growing segments in our portfolio,” Andy Smoak, AT&T’s assistant vice president for device product marketing, says. The K20 at $4 a month is the least expensive Android smartphone ever offered, he says.
The carriers are also highlighting other cheap phones they’ve added recently, such as the Samsung Galaxy J7 for $8 a month at AT&T or the LG Aristo for $6 monthly at T-Mobile (tmus).
Since the wireless carriers eliminated subsidies on smartphone purchases, the rate of customers upgrading have plummeted to record lows this year. There was a minor boost earlier this year with the release of Samsung’s new Galaxy S8 line, but still only about 5% to 7% of customers upgraded in the second quarter at the four major carriers. The expected arrival of new iPhones from Apple(aapl) in the next few months will likely create an even bigger uptick in upgrades than the S8, but overall upgrade rates are expected to remain well below the levels of a few years ago.
That’s hurt revenue growth and played a part in depressing the number of customers defecting from one carrier to another. It’s also limited the ability of the carriers to use their airwaves more efficiently, since some of the latest bandwidth-conserving technologies require newer handsets.
Part of the problem is simply the “good enough” factor. Phones that are a few years old still run popular apps like Facebook(fb), Snapchat (snap) and Google’s (googl) YouTube. But price is also a big reason for the plunge in upgrade rates, industry executives say. “Cost is impacting their decision-making,” AT&T (t) CFO John Stephens told analysts about the low upgrade rate on last month’s quarterly results call, saying “It’s made it their pocketbook decision.”
Market saturation is another part of the upgrade challenge. The number of smartphones in use in the United States has skyrocketed from under 50 million in 2010 to almost 300 million now, Jan Dawson, chief analyst at Jackdaw Research points out. “If carriers want to keep signing up more smartphone customers, they’ve got to lower the barriers to entry, and so we’re seeing some really aggressive deals from the carriers on budget smartphones,” Dawson says.