A T-Mobile representative shared this example “Zero Down Sale” chart over email, for customers that choose an Unlimted Value plan with the carrier:

In some cases, this is a solid deal. The Windows Phone 8X, for example costs $599.99 if purchased outright. With the Zero Down Sale rebate, it comes to $400 and includes the lower-priced plan vs a subsidized or regular plan. That Samsung Galaxy S III is $549 paid in full for a Value Plan. But the $200 rebate saves $150 over 24 months. I’m not sure I’d buy a Nexus 4 this way, however: You’d pay more buying it with T-Mobile than through Google directly, if you can catch a day where it has stock to sell, that is.

Since U.S. cellular customers are used to subsidies, this sale offers a nice transition to the full price smartphone costs that T-Mobile will be pushing next year. In fact, customers will likely notice little difference in their bills: The Value Plans typically save $20 a month over T-Mobile’s Classic plans, which ends up being the same as the monthly hardware installment.

Even if most don’t realize this, it’s going to be challenging for the operator to show the value of a non-subsidized model, because customers are used to it. But it could open the door for more competition between handset makers who now have a major U.S. carrier that actively supports a “bring your own phone” plan that’s cheaper than traditional mobile phone plans on subsidized hardware.

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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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Families may be the biggest benefactors of T-Mobile’s new plans, based on this example. Two smartphone users with unlimited voice and messages, combined with 2 GB of mobile broadband per month and a $15 per handset payment plan would save between $70 to $80 per month over similar service from AT&T, Verizon, or Sprint (s) under the new plans.

Without the monthly payment for the two smartphones, the Value plan is reduced to $99 per month. Given that both of my kids dropped iPhones for a pair of Sidekick 4G smartphones (what can I say; they like the keyboards!), I’ll be stopping by my local T-Mobile store to make this switch from their current individual plans. And the 2 GB of monthly data is more than enough for their meager needs. Of course, if they blow past that amount of data in a month, T-Mobile will slow their speeds from HSPA+ levels to a lowly EDGE connection.

Hopefully, once AT&T consumes T-Mobile, the carrier doesn’t forget to offer the low-priced plans that many equate with T-Mobile. AT&T has said that T-Mobile customers on contract prior to the merger will be able to keep their existing plans, the details of what happens after those contracts expire isn’t clear. I expect consumers in that situation will be able to continue on as month-t0-month users. When it’s time for a new smartphone, however, ex-T-Mobile customers could be looking at higher rates. As Om said when the deal was announced, everyone loses.

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