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 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 Kyllo; T-Mobile image courtesy of Flickr user swruler9284

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T-Mobile will shift entirely to its unsubsidized Value Plans, which offer customers far cheaper rates for voice and particular data. Traditionally carriers factor subsidies into their normal contracts rates – basically you’re paying a mortgage on your phone. With the Value program, T-Mobile is keeping the contract, but passing what it saves on subsidies back to consumer.

According to T-Mobile, 80 percent of its activations in the last quarter were for value plans, which leads it to believe there’s a huge demand for this kind of a model. The question is whether the iPhone breaks the model. The unlocked, unsubsidized price of the iPhone 5 is steep, between $650 to $850 depending on the model. One of the reasons the iPhone is so popular is because the operators offer big subsidies for the devices, driving the out-of-pocket costs to as low as $200.

T-Mobile will have to explain to customers that they will actually save money over the length of a two-year contract by paying a lower value plan rate. And while there would be truth in T-Mo’s claims, it’s still a hard sell to many consumers, especially with the iPhone’s huge price tag dangling in front of them.

But T-Mobile has something up its sleeve. Legere said that T-Mobile would offer the iPhone in a unique way. He implied that T-Mobile could heavily finance the device, selling it for $99 and then charging $15 to $20 a month in payments over 20 months. That kind of financing plan, however, would look very much like subsidized contract plan to the customer.

“When this device rolls out I can only tell you it will be a dramatically different experience, and I can only tell you that of all the reports that have been written about what’s going to happen when it comes out, they’re all wrong,” Legere said.

So we know T-Mobile is getting the iPhone, and we know it won’t be subsidized. The only remaining question is when. In the next six months T-Mobile will likely complete the reconfiguration of HSPA+ on the 1900 MHz PCS band, which will make its 3G network iPhone compatible nationwide (today only its 2G service works on the iPhone). Or Apple may want to wait for T-Mobile’s LTE network, which the carrier plans to launch in the latter half of 2013. If Apple does wait for LTE, that almost certainly means T-Mobile will have to wait for the next generation of iPhone, whatever it happens to be called.

Here’s the video of Legere’s talk along with a presentation by CTO Neville Ray. In it they reveal a bunch of interesting details about becoming America’s “Un-carrier”:

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The impetus for this idea (which would levy a fee of two British pounds (about $3.20 US) on every internet account to create a government investment fund), is abundantly obvious: print-advertising revenue, which most general-interest papers rely on for the bulk of their income, has fallen off a rather large cliff over the past several years, and the rate of decline seems to be accelerating rather than slowing. Paywalls may be picking up some of the slack for a few providers, but they are not enough to fill the gap completely — and so companies are cutting back, and in the case of U.S. papers even shutting down print.

Journalism and newspapers are no longer synonymous

Editors like Leigh — and columnists like Roy Greenslade of the Guardian, who wholeheartedly supports the idea of an internet tax to subsidize print papers — are understandably concerned about the effect that this unprecedented industry decline is likely to have on journalism, which they argue serves a crucial public purpose and therefore can’t be left to the whims of the marketplace. Others in the U.S., including New York Times media writer David Carr, have raised similar concerns about the effect on cities such as New Orleans when their newspaper shrinks in size or stops printing, and can (theoretically at least) no longer hold politicians and other evil-doers to account in the way they always have. As Leigh puts it:

“When the day comes that the newspapers are forced to stop printing altogether, it will be a disaster for democracy. The lean pickings from web advertising on a free newspaper site will only pay for a fraction of the high-quality investigative journalism that commercial newspapers generate.”

There are a whole series of problems with the internet-tax idea, many of which journalist Allan Donald has summarized in a smart and funny post (which, as Chris Dixon points out, imitates a popular geek response to early spam-fighting ideas). Among his points are that such a plan “tries to support a fundamentally broken business model” and “users of the web will not put up with it.” As Paul Carr notes at Pando Daily, the idea of compensating or financing newspapers based on their readership and market share could also worsen some of the existing problems with digital media, since all it would do is encourage papers to boost their traffic by whatever means possible.

But one of the biggest flaws with the tax idea, as Charlie Beckett at the LSE points out, is that it is based on the principle that journalism — of the kind that is deserving of government funding — is synonymous with newspapers. Even if that was the case in the distant past, it clearly isn’t any more: such a plan would leave out a growing number of alternative providers, from non-profit entities like the Bureau of Investigative Journalism to smaller web-only media outlets (some would argue that the Guardian is also a non-profit, but not by design). And these kinds of alternative services and startups, many of whom are trying to reinvent journalism for a digital age, are arguably more deserving of funding than the large newspapers who already have giant market share.

Taxing internet users would do little to “save” journalism

The reality is that the internet-tax plan would do very little to help subsidize journalism that is in the public interest. Instead, it would be used to subsidize a failing business model, one that continues to be based primarily around a dying medium called print. How would that benefit society as a whole? I think Carr is right when he says the industry needs to be more creative in finding a range of small ideas and solutions to their problems, not depending on a massive publicly-funded bailout.

Some of the proponents of the internet-tax idea argue that it makes sense for Britain to take such measures, since a similar structure — namely, a government-imposed TV tax — is used to subsidize the BBC. But whether you believe that a tax on the purchase of a specific consumer product is the appropriate way to do such a thing (which I would argue it is not), creating a single government media outlet for public-service purposes is a very different thing from setting up a fund that would be used to prop up an entire industry.

American newspaper owners like Advance Publications — which has shut down a print paper in Michigan and cut back on printing in a number of other cities — have been criticized for their failure to negotiate the transition from print to digital well, and there is no question that their handling of the move and their digital replacements leaves a lot to be desired. But at least they, and other struggling newspaper chains such as the Journal Register Co. (which recently filed for bankruptcy for the second time) are trying to find a way towards a new model, not asking for governments to subsidize the existing one.

Saving — or rather, enhancing and expanding — journalism is a noble and worthwhile goal, and finding innovative solutions for doing so is a commendable idea. But taxing internet users to prop up a largely print-based newspaper industry is not the same thing. Not even close.

Post and thumbnail images courtesy of Shutterstock/iQoncept and Flickr user Zarko Drincic

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The Verge confirmed with store representatives that the policy change will start Monday, and in fact, AT&T’s $35/3 GB contract tablet plan has disappeared from its website. AT&T only subsidized Android slates, not the iPad, so the impact won’t be huge. AT&T also isn’t the only operator to dump tablet subsidies. Verizon did so in June when it launched its shared data plans. But these policy changes are significant.

As my colleague Tom Krazit points out smartphones are fundamentally different devices than tablets. While mobile data connectivity is the smartphone’s primary reason for existing, cellular broadband is a secondary consideration for customers investing in a coffee-table computer. Consumers have shown they’re willing to pay the tablet’s steep price tag, but they’ve shown less willingness to invest in expensive mobile data plans and long-term contracts when Wi-Fi is so readily available.

By eliminating tablet subsidies, AT&T is discarding the $5 a month surcharge on tablets and pretty much normalizes data pricing across individual smartphone and tablet plans. AT&T customers will soon offer customers two choices: sign up for an individual no-contract plan (250 MB/$15, 3 GB/$30, or 5 GB/$50), or for one of its forthcoming shared data plans, which allows customers to add a tablet to pooled data bucket for an additional $10 a month.

But AT&T should go one step further. Now that customers are paying the full costs of their slates, Ma Bell should charge less for tablet data than it does for smartphone data. Here’s why: Subsidies aren’t traditional discounts or sale; they work much more like mortgages. Carriers give you an expensive device at a low up-front cost, but recover the subsidy through premiums factored into your plans over the next two years. If there’s no subsidy then it stands to reason customers shouldn’t pay those higher rates. T-Mobile has already adopted this approach, charging much cheaper data and voice rates to customers who bring their own devices.

I won’t pick on AT&T too much. Ma Bell is actually the most progressive (or least regressive) operator when it comes to tablet data plan pricing. In a recent analysis of U.S. carrier data plans, we found that AT&T had the cheapest per-gigabyte rates for tablets and mobile broadband than any carrier. Even T-Mobile’s new discounted value plans are in some cases more expensive than AT&T’s regular rates. For the same $30 price AT&T charges for 3 GB a month, T-Mobile only gives you 2 GB.

Operators are beginning to realize that tablet subsidies aren’t the way to go. Now they need to eliminate legacy subsidy pricing models. AT&T and Verizon’s shared data will solve the problem in part by allowing customers to draw tablet and smartphone data from a common pool – though they have other problems. But operators really want the tablet revolution to occur over their networks and not over Wi-Fi, they need to make tablet data cheaper.

Approved photo courtesy of Shutterstock user Stuart Miles

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(Apple may be expanding its experiment beyond Leap. According to TechnoBuffalo, Sprint prepaid operator Boost Mobile is getting the iPhone as well.)

Apple already offers unsubsidized iPhones in the Apple Store and through other sales channels, but it’s hardly the focus of its strategy. Apple’s primary sales channel is the carriers that absorb much of the cost of the device up front. In exchange, the carriers lock subscribers into long-term contracts and ultimately charge their customers higher voice and data rates to recoup those subsidies.

The prepaid service Leap offers through its Cricket Communications brand turns that model on its head. It charges a higher price for the phone — in this case $500 for the 16 GB iPhone 4S and $400 for the 8 GB iPhone 4 — in exchange for a much lower monthly service plan. American consumers have typically fallen for the allure of the cheap phone, which has made Apple reluctant to challenge the traditional subsidy model, but Piecyk thinks Apple may be reconsidering its strategy. From the BTIG blog (registration required):

We believe that industry-wide Q2 phone sales have been sluggish as we previously forecast and in addition Apple might already be feeling an incremental lag in iPhone sales ahead of an expected new product launch.  To be clear, the less than 200,000 iPhones that Leap is likely to sell each quarter barely moves the needle for Apple, but Apple has added several small operators in the US during the quarter.  More importantly, the change in upgrade policies by large US post-paid operators might have induced Apple to send the proverbial canary into the coal mine to see if the American consumer is willing to fork over $500 for a 16 GB iPhone 4S in order to save on a monthly data plan compared to the $200 that the post-paid operators are charging.

If that canary leaves the coal mine still singing (i.e., Leap meets or exceeds its modest sales expectations), Apple may very well have a huge opportunity on its hands. The number of SIM card plans has exploded in the past year, offered not only by T-Mobile and AT&T but a host of mobile virtual network operators (MVNOs) that ride over the former two operators’ networks. Tracfone’s Straight Talk offers essentially the same plans as AT&T at almost half the price ($45) and even undercuts budget services like Cricket.

MVNOs like Straight Talk and H2O Wireless hardly have the huge brand recognition of AT&T and T-Mobile, but if Apple were to decide the market is now ripe for unsubsidized iPhones, it could use its considerable marketing muscle to educate consumers about prepaid SIM card services.

Haven’t we heard this story before?

When Apple and AT&T launched the original iPhone in 2007, they charged full (or near-full) price for the devices: $500 to $600 depending on the model. After an initial rush, sales dropped, and it wasn’t until subsidies kicked in that the iPhone boom truly began. Given that history, Apple may be hesitant to dive back into unsubsidized sales again. But the market is different today than it was in 2007.

First, Apple’s initial foray into full-priced iPhones didn’t carry any benefit for the consumer. AT&T still locked customers down into two-year contracts and still charged high voice- and data-plan rates. Second, there are a lot more options for the iPhone today. There are now a plethora of MVNOs using AT&T’s networks, and T-Mobile (and its MVNO partners) will soon be able to fully support the device.

There’s also the question of whether Apple’s customers are willing to pay what Apple deems is the full retail value of the iPhone. Leap isn’t forcing its iPhone customers into contracts and is offering cheap data plans, but it’s still subsidizing the device. Its two versions of the iPhone are going for $150 less than what Apple charges for its unlocked phone in the Apple Store. A fully loaded iPhone 4S runs $850, which is going to be well outside many consumers’ price range. If Apple does pursue an unsubsidized strategy more aggressively, it may have to focus on older-generation models, which it sells at much steeper discounts.

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Here’s the full statement as published in the Gray Lady’s Bits blog:

• Customers will not be automatically moved to new shared data plans. If a 3G or 4G smartphone customer is on an unlimited plan now and they do not want to change their plan, they will not have to do so.
• When we introduce our new shared data plans, Unlimited Data will no longer be available to customers when purchasing handsets at discounted pricing.
• Customers who purchase phones at full retail price and are on an unlimited smartphone data plan will be able to keep that plan.
• The same pricing and policies will be applied to all 3G and 4GLTE smartphones.

What that means is that you can probably cling to your unlimited plan from now until the end of time, like some old codger that refuses to give up his party line. But Verizon isn’t going to make it easy on you. The people who like unlimited data tend to be the people who like high-end smartphones, and since Verizon will no longer cut them deals when they upgrade to newer and better devices, they’ll be on the hook for full sticker price. I’m not sure if you’ve seen the prices on a brand new unlocked iPhone lately, but they ain’t cheap: $650 to $850 depending on the model.

The odd thing is, depending on how they’re priced, Verizon’s new shared plans might actually wind up saving a lot of current unlimited customers money. For instance, if you’re in a household with two smartphones both grandfathered to unlimited, you’re basically paying $60 a month for data. If Verizon keeps its same pricing structure in place you could get 2 GB to share for half the monthly cost, plus whatever per line charges Verizon chooses to charge.

The larger majority of U.S. smartphone users consume less than 1 GB of data a month. There are still plenty of people who use their unlimited data plans to the hilt – many of them GigaOM readers – and they’re going to hate this policy change in the very cores of their beings. But my bet is that a lot of people currently on unlimited plans might benefit from switching over to shared data. We’ll have to see the details of Verizon’s shared pricing, though, before we can say for sure.

Buffet image courtesy of Flickr user Wesley Fryer

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Speaking at a Geekwire conference earlier this month, T-Mobile CMO Cole Brodman said if he had a magic wand he would use it to eliminate subsidies in the wireless industry because giving huge discounts in exchange for two-year contracts basically de-values mobile technology. His point was that if you charge me $50 for a $500 smartphone, you’re teaching me that the sophisticated mobile computer in my hand is just a mere throw-away device.

That’s bold talk from a carrier, especially from T-Mobile since it aggressively subsidizes it handsets. But nobody really expected T-Mobile to do anything about it. As Brodman admitted in his Geekwire talk, handset subsidies are here to stay, no matter how much wireless carriers claim to disdain them. But it appears T-Mobile does plan to doing something about subsidies: it’s taking the unusual step of raising prices on customers that opt for phone discounts.

According to documents obtained by TmoNews, in April T-Mobile plans to raise prices by $5 on two of its most popular mobile data bundles, but only on new customers who take a discount device from the carrier. Its value bundles, which allow a customer to pay the unsubsidized price of a phone up front or in installments (also known as bring your own device), will remain the same price and are already substantially cheaper then “Classic” subsidized plans. The bottom line is that new customers who fall for the lure of a cheap smartphone could wind up paying as much as $20 more a month for a voice and data plan than a customer who opts to fork over the device’s true cost.

Price increases are usually never good, but as TmoNews’ David Beren claimed, this may be the exception, and I happen to agree with him. Subsidized phones are truly never free. Operators just factor in the cost of the device into the contract. We wind up paying higher prices per megabyte and per voice minute because of it. The problem is once those contracts expire and operators have made back their customer acquisition costs, they don’t charge lower rates.

T-Mobile is removing the shadowy accounting veil from those policies, showing – quite aggressively – that a good deal of the cost of our rate plans is really just a mortgage payment against our phones. Do the math yourself: $20 times 24 months equals $480 in savings over the life of a contract. Meanwhile you can buy T-Mobile’s newest smartphone, the Nokia Lumia 710, for an unsubsidized price of $350. Suddenly that ‘free’ subsidy doesn’t seem like such a great deal anymore.

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In France, subsidies are being targeted on a very specific market: students.

With a publicity push from the country’s Ministry for Higher Education, college kids from Paris to Perpignan are being offered a slew of deals to tempt them onto tablets. First market leader Orange started offering iPads and Samsung Galaxy Tabs for just €1 ($1.30) as part of an education package; now Bouygues Telecom, France’s third-largest mobile operator with around 10 million subscribers, is running its own version of the deal.

The Bouygues offer, which is being launched in partnership with the French government’s ministry for higher education, isn’t for those mainstream tablets yet — but instead focuses on the Archos 80 G9, an 8-inch tablet running Android’s Honeycomb OS.

The device itself is only so-so: one CNet reviewer said that while it’s not bad, users should “consider very carefully whether the relatively low price is worth the design and performance problems”. But it is now officially dirt cheap: for €19.90 each month (that’s about $27) students can buy the Archos –which usually costs $299 — for a single euro, and get 1GB of 3G data and unlimited access to the company’s network of Wi-Fi hotspots.

With similar iPad deals on offer, it seems unlikely that deals like this will help competitors like Samsung and Archos wrestle some market share away from Apple, but it may help increase the overall market for tablets, which still has plenty of room to grow. And that is particularly important for Android devices, because while it can claim 30 percent market share on paper, the reality is likely to be far lower, as Kevin pointed out this summer.

This is not to say that subsidies are a slam-dunk, however. When Orange UK started offering cut-price iPads with a 24 month contract at the end of last year, it expected massive take up: in fact, it reportedly sold less than 1,000 contracts in the first week.

But targeting the student market is smart. It’s a big group of potential buyers: in France, around 1.4 million people are enrolled in universities out of a total population of 62 million. And cash-conscious college goers are happy to amortize the costs of a device over the lifetime of a contract, rather than pay up front. And they are voracious consumers of technology: you only have to look at the prevalence of Apple products in universities to see how brand matters to them — plus, if you get them hooked and they may stick around.

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