Why buy the latest smartphone when you can lease it?

We can lease cars and all kinds of other products, so why not a smartphone? TMNG Global (s tmng), a consulting and strategy firm that works with all the major carriers, is introducing the first mobile device leasing program in the U.S., which will allow operators to offer no-money-down one-year leases for handsets to their best customers.
The Mobile Device Lease xChange will be administered by MDLx, a subsidiary of TMNG. The program will offer carriers an integrated business system for mobile device leasing along with a technology platform for lease administration and accounting. No carriers have officially signed on to the program but MDLx’s chief marketing officer Tom Murphy told me discussions are ongoing with tier one carriers.
Under the MDLx program, a carrier would be able to offer their top customers the ability to lease a phone for 12 months at about $20-30 a month for the device. They would need to pay for voice and data plans separately and the device would need to be covered through an insurance plan, either though the operator or by the customer themselves. The amount of the payments would vary based on the value of the device and the carrier has the option of waiving the insurance plan, accepting a deposit instead.
Murphy said the carriers would ultimately choose which devices to offer under a lease program, how much they charge and who would qualify. He said it could be an attractive option for consumers who don’t want to remain locked into two-year contracts, which force them to absorb either the full cost of a new phone before their contracts expire or pay early termination fees to get out of their agreements. Leasing would allow them to stay current on the latest devices and be assured they are up to date on technology. And it could be especially popular for iPhone (s aapl) lovers, who want to move up to the next model when it comes out each year.
“We’re cutting the commitment to the device in half so there’s no longer a two-year commitment and early termination fee,” Murphy said. “Technology assurance is the value proposition for consumers.”
Leases would presumably be offered on higher-end devices that can fetch a good return after 12 months. For carriers, this allows them to better deal with the high cost of device subsidies for top smartphones. Even as device prices push past $600, carriers have face pressure to keep prices for subsidized devices at $300 or less. In the leasing  scenario, the carrier’s financial partner would own the device for 12 months and then when it was returned, MDLx would find either a good secondary channel to sell it, or the carrier could buy it at market value and then resell it directly to consumers. MDLx would oversee the leasing program, managing the relationship between the carrier and the finance partner.
“The economics of the mobile device market are complex and particularly burdensome for carriers, who must offer the latest technology at affordable price points.  Escalating smartphone prices, higher subsidies absorbed by carriers, market-driven caps on consumer upfront payments and regulatory pressure to eliminate early termination fees – are all factors which contribute to frustrations for carriers, subscribers and even the OEMs,” said Don Klumb, TMNG Global’s CEO.  “We think the market is ready for a viable smartphone leasing option.  MDLx provides a complete solution that enables carriers to dramatically reduce their device subsidy obligations; provide subscribers access to the latest device technology as it becomes available and on a more frequent basis; and also benefits OEMs by decreasing their sales cycles by half and facilitating development of new technology with less concern for carrier subsidy constraints.”
TMNG built the leasing program based on the experience it had running a handset recapture program that is in use by Sprint (s s). Through that program, TMNG was able to learn the secondary market for returned devices and figure out how to predict the worth of handsets. With stable pricing for devices, TMNG is able to create a program that leaves the carriers ahead after 12 months. But the strategy depends on leasing only to the most reliable customers, probably in the top 8-10 percent of post paid customers, to ensure carriers aren’t exposed to too much risk, said Murphy.
The concept of leasing phones has picked up recently. O2 in the U.K. launched a proprietary leasing program in December for the iPhone 4S that started at about $86 a month for both the device and service. Similar to MDLx, O2 lessees don’t own the product and can move to another device after 12 months. GigaOM freelance contributor John S. Wilson wrote a couple weeks ago urging carriers to consider leasing programs just like MDLx, saying it’s one way to get consumers to actually like their carrier contracts.
Leasing won’t become a big tool for carriers right away. But I think it makes some sense to offer different options to consumers, providing plans that give them flexibility without much upfront cost. Now that most carriers have been doing away with one-year contracts, it can also be a tough proposition for early adopters, who have to decide between paying full price for a new device without a contract or getting stuck with an agreement that lasts two years. Having a leasing option means they can always be looking forward to picking up the newest phone in a year.
But I’m curious what will happen to used phone prices if a significant number of devices from leasing programs start hitting the market. It could hurt secondary prices, which could threaten the whole leasing system since its based on stable secondary value for used phones. Though as Consumer Intelligence Research Partners reported, there is also an added benefit for carriers, who can get a new service contract from a used device without having to pay a subsidy.
I’ll wait to see if carriers actually take this up, but with carrier subsidies eating into profitability, they may interested in giving this a shot. And consumers may be open to a new way to get their hands on the latest devices.
Photo courtesy of Flickr user CC Chapman.