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Summary:

Everyone may be focused on the forthcoming T-Mobile iPhone, but T-Mo revealed a strategy Thursday that will have far greater implications for the mobile industry. By eliminating subsidies it’s changing the way phones and services are sold and altering the consumer’s relationship to the carrier.

T-Mobile dropped a bomb on Thursday, and I’m not just talking about the iPhone. T-Mobile have been waiting five years for Apple’s iconic smartphone, but its decision to end phone subsidies will have a far bigger impact on its business and potentially change the U.S. mobile industry at large.

Put simply, T-Mobile is upending the established business and device distribution models of the U.S. wireless industry, separating the handset from the service. It’s a model that’s thrived in Europe and other countries, but it’s one that’s failed to gain traction in the U.S. except in the prepaid market, namely because U.S. consumers like getting even the most sophisticated high-end phones on the cheap.

Traditionally a U.S. operator sells a device at a steep discount in an effort to lure customers. It doesn’t just write off that subsidy. It makes that money back and then some by charging higher rates for voice and data over a long contract term. It’s a model that’s worked well for big operators like AT&T and Verizon Wireless, turning them into two of the most profitable and highest revenue-generating operators in the world despite the fact that many multinational carriers have far more subscribers.

T-Mobile store logoT-Mobile proposes to reverse the equation with its Value Plans. Customers pay the full cost of their device, either up front or in installments, or bring their own compatible handsets. In exchange, T-Mobile will offer them cheaper rates, in many cases $20 a month cheaper than it would charge for a subsidized phone plan. Do the math: that’s $480 in savings over two years, which in many cases is much more than the up-front discounts operators are offering on subsidized phones (For instance, a Samsung Galaxy S III subsidy on T-Mobile is $350 including rebate). Given that T-Mobile’s subsidized rates are already much cheaper than its major competitors, the savings from T-Mobile’s Value Plans are compounded.

The repercussions of T-Mobile’s strategy will be felt far beyond the point-of-sale and monthly bill, though. If successful, T-Mobile’s elimination of subsidies could have a huge impact throughout the U.S. mobile ecosystem, changing how we value our devices and our relationships with our carriers and handset manufacturers.

  • The rise of phone financing: T-Mobile knows that it will take a while for consumers to overcome the sticker shock of a paying full freight for phones. T-Mo CEO John Legere said T-Mobile would implement financing programs that would mitigate those up-front costs. In the example he gave, a customer could get an “iconic smartphone” for $99 down with monthly installments of $15 to $20 for 20 months.  This will look pretty similar to a subsidy plan to most customers – the device payments will just be separate from the service fees on the monthly bill. But operators won’t necessarily be the only ones financing. Handset makers, electronics retailers could offer their own programs.
  • Greater portability of handsets between carriers: There will always be restrictions on where you can bring your phone due to huge variation in network technologies used by U.S. carriers. But moving to an unsubsidized model means for the first time consumers can buy their devices and then select their carriers. Keep in mind T-Mobile’s Value Plans are still contract plans (for now), but it offers prepaid plans as wells. By buying their phones up front consumers would have more flexibility in moving GSM/HSPA phones between T-Mobile, AT&T and the growing number of mobile virtual network operators (MVNOs) that use their networks.
  • Less carrier control: If your carrier isn’t selling you your device then they should have less say in what services or apps you can use. That could be a simple as avoiding the pre-installed apps carriers load onto our smartphones, but it could also mean that you’re no longer dependent on your carrier to ship you OS upgrades. It will also be more difficult for them to restrict over-the-top services over their networks (read FaceTime) or limit you to their mobile payment services.
  • A larger selection of devices: Carriers have always acted as device gatekeepers in the U.S. Until recently, Nokia couldn’t make a dent in the U.S. because it couldn’t strike the right operator deals. Unsubsidized phones mean that vendors can start marketing and selling directly consumers with no carrier middleman.
  • Huawei and ZTE could become household names: These two Chinese juggernauts have made some in-roads to the U.S., but they’ve only gotten as far as the carriers have let them. Mostly their U.S. business consists of low-end feature phones or inexpensive carrier-branded smartphones like T-Mobile’s MyTouch. But a vibrant direct-to-consumer market could benefit Huawei and ZTE immensely. Both can make high-end smartphones at low prices, which would be very appealing to consumers paying the full cost of their devices.
  • The development of a vibrant phone resale market: Smartphones are expensive and sophisticated devices, but their low subsidized cost in the U.S. has caused us to treat them like throw-away electronics. But if customers are faced with full sticker price of their phones, they would be more inclined to reuse them and sell them to recover their costs, and customers on a budget would be more inclined to buy used and refurbished phones.

Of course, T-Mobile is just one carrier. The other operators have also expressed discontent with the subsidy model, but they aren’t going to give up on it overnight. In fact, they will probably attempt exploit T-Mobile’s big strategy shift for all its worth. Verizon, AT&T and Sprint have a huge advantage: they will “sell” the same iPhone for $200 that T-Mobile is asking customers to buy for $650 – that’s a powerful argument.

T-Mobile has a tough job ahead of it convincing customers they will save money and benefit from its model in the long run. If T-Mo succeeds, other carriers will follow its lead, changing the U.S. mobile industry for the better. If it doesn’t, this will be just another noble but failed experiment for the history books.

Feature photo courtesy of Shutterstock user Robert KylloT-Mobile image courtesy of Flickr user swruler9284

  1. You forgot the most disruptive trend that might take over the market ,Google ,Amazon and maybe others selling devices at cost.
    As for T-Mo’s “tough job” in convincing customers they will save money , it’s a rather simple job (granted for now even the so called tech press is rather confused ). It’s all in how you present it, they can simply list the device as “Starting from 99$” and present the available options on the next page.From that point everybody will choose whatever makes them happy.That way there is no downside compared to the older system just an upside from folks that actually can understand what is better for them.
    Financing plans wise, many might want to upgrade every year,the hardware is still in it’s infancy so it’s evolving very fast and for anyone wanting to always have a decent device 12-18 month is more fitting so it would be good if thee are plenty of options about how fast one wants to pay.

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  2. Michael W. Perry Friday, December 7, 2012

    T-Mobile would be even more disruptive (for the good), it they could come up with a way to unlock those millions of AT&T iPhone out there that are post-contract.

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    1. AT&T will now unlock post-contract Iphones – I took my Iphone 4 to t-mobile when my original 2-year contract ran out earlier this year. It was easy, I was able to do it over online chat. The biggest issue was that I had to wait until December for T-mobile to finish their spectrum refarm in my area (south Florida) before I got 3G speeds.

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    2. by law if your contract has ended with a cellular provider (at least here in California), they are obligated to unlock your locked cell phone for free.

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  3. If T-Mobile heavily advertises it then it could gain traction. Why should someone who doesn’t decide to upgrade his device after his contract is over have to pay the same rate as someone who gets a new subsidized device? It would be nice if they all the devices in their stores were carrier-unlocked since the customer has to pay the full price anyway.

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  4. Matthew Butch Friday, December 7, 2012

    This is a great development. We have become complacent about a model of network/network access device bundling that we wouldn’t accept elsewhere. Now if we can just decouple our devices from the content stores…

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  5. What he said.

    This is one of the best things that could happen to wireless consumers and device manufacturers. I’m so happy DT had the guts to try this, and hope the market rewards them. They will need to get rid of ETFs on contracts where people bring their own phone, otherwise it negates much of the advantage (or at most, require 60 days notice for termination).

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  6. Next year it should be possible to see $100 unlocked phones with dual core/quad core Cortex A7 chips and Jelly Bean, which will provide more than a good enough experience for most non-techie customers. A lot of people will be buying these phones instead of going for the $500-$700 flagships, and they’ll be happy to get a much smaller monthly fee, too.

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    1. You are right on. Smartphone margins are about to compress to something a lot closer to standard consumer electronics industry margins.

      No more 60%+ GM on iPhones sold to carriers. More like 25%, with channel margins also compressed by more phones purchased through Amazon or other non-carrier retailers. Your top-end smartphone with its $180 BOM cost will retail for $249, contract-free (not even the ‘radical’ $349 Google’s charging for the 16 GB Nexus 4).

      As you point out, last year’s components will cost even less, and as we’ve seen with the PC market last year’s tech will be fine for lots of people, even moreso because of the limited room for new HW features in a phone (Giant lighted case? nope. Extra monitors? nope. RAID storage? nope).

      Apple should do well here – their stock will tank, but they can hold a couple of price points above Android still, and this will leave them a huge margin advantage for further product differentiation. Huawei and the others will go the way of Dell and HP – like selling wheat. But eventually the service component will favor Google and Apple will drown with the rest (and we’ll all be worse off).

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  7. Great article.

    A minor correction – Under the “Greater portability…” bullet, reference is made to the Value Plans being contract plans. The Classic Plans are contract plans, but the Value Plans are specifically referred to as “monthly plans” and do not have contracts.

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    1. Value Plans DO have contracts: “General Terms: Credit approval, $35 per line activation fee, and two-year agreement with up to $200/line early cancellation fee required; deposit may apply.” That makes them a non-starter as compared to prepaid options IMHO.

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    2. You should take a closer look at T-Mobile’s plans. The value plans require a two year contract even if you bring your own phone. That is something that has prevented me from switching to that plan. It makes no sense that I would sign a contact when I am bringing my own device.

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    3. Hi JB,

      Actually Value plans are contract plans — which is becoming a big point of contention with people who otherwise think this is a a great idea. T-Mo may drop the contract requirement when it goes 100% unsubsidized but for now you need to make a 2-year commitment even if you bring your own phone.

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      1. Kevin, et. al,

        I sincerely apologize for the misinformation on the value plans. Apparently, a local agent and myself miscommunicated on this, but in fairness to the agent, I was more interested in the contract-free prepaid plans. I’ll check my info better in the future.

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  8. They have had these plans for over 16 months now. Nothing new.

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    1. Klally, what’s new is T-Mobile is going 100% Value plan, instead of just offering a no-subsidy option. Try reading the article.

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  9. T-Mobile continues to float “doomed to fail” business models. As a T-Mobile customer, I suffered through 4 years of TERRIBLE customer service. Recently, their customer service department has been much improved. Unfortunatley, the coverage and service is really not that great even though you pay less than you would for a similar plan at Verizon, Sprint or one of the other major carriers.

    Taking away the phone subsidies will discourage customers who can’t afford the $480 up front for a premium Smart Phone from purchasing the more expensive service plans. It will also eliminate whatever incentive there was for renewing a contract with the company at the 2 year expiration… Verizon, here I come! (April 2014)

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    1. You know there is a saying in the car community and it goes ” if you can’t afford the maintenance, you can’t afford the car.” I think this situation is similar except if you can’t afford the phone at full price, you can’t afford the service. The price of these phones is not the $0 -$200 that people are used to paying. You are paying for the full price plus more when you sign a contract with the big 3. If you cancel the contract you pay a big ETF. The advantage here is that you can buy a really cheap phone and pay a lower rate. Also if you decide to do a payment plan on your phone, you pay less once your phone is paid off. With the big 3 you pay the same price no matter if you brought your own phone or bought one from the carrier. This reminds me of a commercial where they are advertising the idea of financing Christmas presents if you can’t afford them now. Have fun paying a lot on Verizon. :)

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    2. I’m on Tmobile saving big by walking in with a very decent phone I scored at a pawn shop for $100 cash. It’s the first 4G phone Tmobile ever offered and it’s still not bad: 800×480 screen, dual cameras front and back, Android 2.3, Tmobile-supported tethering/hotspot, room for my existing 16gig MicroSD card. It’s the HTC version of the MyTouch4G.

      What Tmobile is doing here will seriously boost the used phone market, plus we’ll see cheaper Chinese stuff if you want to go that route.

      On subsidy, the same class of phone I paid $100 for would run $480 – $20/mo times 24 months. Screw that. If my phone dies and I can’t fix it, fine, pull the SIM and MicroSD cards, start hunting up pawn shops again. I’m still WAY ahead of the game and I can upgrade the tech every year or two, surfing behind the current “state of the art” same way I do with laptops.

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  10. It’s about time. ATT and Verizon have suckered consumers for too long a time. Having done a lot of business outside the US, I’m always amazed at the low monthly fees paid for unlimited voice and data (well it’s all data anyways)! Consumers here get stuck with high data costs, locked phones, bloatware, poor performance, slow upgrades (both software and hardware), the list goes on and on. If T-Mobile had coverage in my area, I’d switch.

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    1. Alberto Ortega -Tito Sunday, December 9, 2012

      Make sure you talk to another T-Mobile customer before you do. I’ve been a customer for years and put up with subpar coverage because I kept thinking it would get better via an acquisition or infrastructure improvement…no such luck. I can’t tell you how frustrating it is to receive text messages sometimes a day later than they were sent and have to deal with not having any phone coverage while I’m at work for ~10 hours a day. I mostly leave my phone next to a window and occasionally check it for messages for missed calls. I always rationalized it because the price of service was lower for our family plan however now that I have a kid away at college and she has coverage problems too, I’m counting the days until my contract expires.

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