AT&T banks on Next upgrades to draw in customers and wean it off subsidies

AT&T(s t) appears to have a hit on its hands with its new Next upgrade program. It had 2.9 million Next smartphone sales in the first quarter, accounting for 40 percent of the smartphones it sold or upgraded. And despite the fact the program only launched in July, AT&T upgraded 1.1 million customers to new devices in the quarter, letting them take advantage of accelerated payment programs or other promotions.

As we’ve argued in the past, upgrade programs aren’t quite the deals that carriers make them out to be. Basically customers are trading in the subsidy they’d normally receive for signing a new two-year contract for the full cost of the device, with the option to trade in once you’ve made the requisite number of payments. AT&T, however, has made the program much more fair by charging customers on Next (or any off-contract customer) lower monthly rates than it would its contract customers.


Apparently those customers like what they see. AT&T added more 1 million net new subscribers in what is usually a lackluster post-holiday quarter. The mix of new customers wasn’t as smartphone heavy as AT&T has seen in the past, but of its 625,000 postpaid net additional customers (customers not on a pay-as-you-go plan, but not necessarily on contract), 311,000 were smartphones.

But as in previous quarters, Ma Bell was able to make up for slowing smartphone growth by adding new slate customers. New tablet connections actually exceeded new smartphone connections at 313,000 net additions. AT&T also saw a smartphone boost in its prepaid business of 255,000 net additions.

The move to Next and other no-contract plans is providing a lot of benefits for AT&T. Since it’s not subsidizing so many devices, it’s starting to book a quickly increasing revenue stream from monthly device installments. AT&T said its equipment revenue was up 50 percent from last year, while its service revenue was up only 2.2 percent. And while these customers aren’t technically on contract, they’re still on the hook for their device payments and can’t flee to other carriers (though T-Mobile(s tmus) is trying to entice them by offering to pay off their debts). The percentage of customers AT&T lost to other carriers stayed the same as last year.

The faster upgrade cycles also mean AT&T is moving its customers more quickly onto more advanced — and more data hungry — devices. Of the 53 million smartphones on AT&T’s network, 57 percent are now LTE handsets, and 46 percent of its customers have migrated over to shared data plan of 10 GBs or larger.

AT&T posted a profit of $3.7 billion for the quarter off of $32.5 billion in revenues. It now has 116 million total subscribers.