Free Phones Are Back. Why?

Telecom companies are going to the free-phone well once again.

In a repeat of a decades-old strategy, AT&T, Verizon, and other wireless carriers are offering free or massively discounted prices on the latest iPhone and Android devices to customers who sign a two-year contract. The wireless market is intensely competitive, with customers frequently switching providers and often at a cost to the carriers, who lose the monthly fees from the contracts. By giving away phones—not to mention subscriptions to streaming video services like Disney+ or HBO Max as well—carriers are trading the up-front cost of the device for the recurring revenue of long-term contracts. (The latest iPhone and Android devices retail for $700 or more.)

While such giveaways are as old as retail—the “give ’em the razor, sell ’em the blades” business model goes back more than a century—current economic conditions are ripe for such promotions, says Tom Wrobleski, a Korn Ferry senior client partner and a global account leader for the firm’s Consumer practice. During the pandemic, consumers saved an extra $2.4 trillion, and now they are anxious to spend that money. “Consumers have tons of discretionary income to spend right now,” says Wrobleski.

And that income may not last. Indeed, Wrobleski says that telecom leaders believe inflation will become an issue, as one supply chain issue after another mount. Already, prices for gas, groceries, and other goods are rising at eye-popping rates—in April, inflation rose at its fastest pace since 2009. Wrobleski likens giving away phones now to a reverse-psychology play, locking customers in when they can spend to keep them from fleeing to a cheaper alternative when they can’t. “It’s a nice hedge against inflation concerns,” he says.

The problem, however, is that giving away phones is only a short-term solution, says Jamen Graves, a Korn Ferry senior partner in leadership and talent consulting who specializes in technology. The battle for customers in the wireless market will only get more intense as carriers seek revenue to build out 5G networks and other services. Competitors will eventually find ways to match phone giveaways or offset costs, leading to the very contract canceling and switching the promotions are meant to dissuade, says Graves. “Carriers need to reinvent the customer relationship so that they are selecting them versus getting stuck in long-term contracts,” he says.

For now, however, there’s nothing more powerful than peace of mind, says Daniel Rubin, a senior client partner and global account leader for Korn Ferry. Given how reliant people are on their phones, he says the security of a long-term contract could be exactly what customers who have gone through 18 months of uncertainty want from their wireless carriers. While Rubin concedes that past phone giveaway promotions wore thin over time, he says that “now could be a perfect time for companies to achieve continuity for themselves and for their customers.”