For users who cannot afford a contract, cheap, unlocked smartphones are the future. Apparently, according to AT&T's CEO, unlocked smartphones are the future for contract subscribers too, whether they like it or not.

AT&T's captain, CEO Randall Stephenson, sees the contract-locked, carrier-subsidized model of selling smartphones as a thing of the past. He spoke to investors earlier this week in New York City, basically telling them that AT&T can no longer afford to offer huge discounts for smartphones on a two-year contract. If you're an on-contract subscriber with an upgrade due, get that $200 top-tier smartphone while you can.

According to CNET, Stephenson cited smartphone market penetration as the chief reason why subsidies are neither needed nor worthwhile for the company. "When you're growing the business initially, you have to do aggressive device subsidies to get people on the network," said Stephenson. "But as you approach 90 percent penetration, you move into maintenance mode. That means more device upgrades. And the model has to change. You can't afford to subsidize devices like that."

Wireless companies have subsidized phones for years, offering a lower entry price (or even "free" devices) before smartphones even existed. But with high-tech devices whose real cost can be anywhere from $500 to $1000, wireless companies are still offering upgrade or signing prices of $100 to $300, attempting to sponge back some of the initial cost through monthly payments.

With so many extant customers upgrading their devices, and a shrinking market of potential customers - many of whom haven't bought a smartphone because they use prepaid wireless and will probably buy an unlocked device as their first smartphone anyway - big wireless companies will lose money if they continue to take up to two-thirds off the price of a new, expensive smartphone.

Stephenson hinted that AT&T may be moving in the direction of financing smartphones, separating the device and plan payments like AT&T's Next early-upgrade program. ""If you are a customer and you don't need to upgrade your device, you can get unlimited talk and text and access to the data network for $45 all-in," he said. "You can use your own device or finance it. I think this will be very powerful. It's where we see the market going." But Stephenson admitted that breaking many customers off from the two-year subsidy system would be difficult.

Stephenson's view of the industry's future doesn't come as too much of a surprise, after AT&T announced a new $15 discount on its "no annual service contract" option for Mobile Share Value plans last week (a move that prompted this LatinoPost column: "AT&T's New Plan Confirms It: Why Unlocked and Pre-Paid Are The Next Big Things in Wireless.")

And the shift away from subsidized phones will probably not be hard for two kinds of wireless customers: those on both the high-end and low-end. For so-called "power users," the two-year device cycle is far too long, and early-upgrade plans like AT&T Next and others are popular for those who can't wait more than a few months before buying the next greatest smartphone.

As I've argued before, the bargain buyers whose financial situations are not conducive to a two-year contract are the biggest untapped market for both device makers and wireless companies. These customers need their smartphones to be "unlocked" from contracts (which also means unsubsidized), but also good quality, and their needs are increasingly being met by both small manufacturers and big IT companies like Google and Motorola. Stephenson also sees this as the next big thing in wireless, and assured shareholders that the off-contract, "down market" customer is the AT&T's next big target, after acquiring prepaid carrier Leap Wireless. "You will see us go very aggressively in the prepaid market," said Stephenson.

Adding to the market pressure against subsidies is the fact that the Federal Communications Commission is pushing wireless companies to allow devices at the end of contracts to be unlocked (or else it will regulate). If this becomes the norm, contract-subsidizing carriers could essentially be giving away some part of the cost of their devices free to customers who leave after the contract is fulfilled and take their smartphone with them. A shift like that will assure that AT&T and other big carriers will end subsidies.