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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However, underlying the statistics are numbers that tell a far different story: in fact, there was a dramaticslowdown in wireless traffic growth during the first half of 2012. Of course, CTIA doesn’t want anyone to realize that, because it is significantly at variance with CTIA’s narrative of an impending “spectrum crunch”into which so much lobbying effort has been invested.

The CTIA press release only quotes total wireless data traffic within the US during the previous 12 months upto June 2012 for a total of 1.16 trillion megabytes, but doesn’t give statistics for data traffic in each individual six-month period. That information, however, can be calculated from previous press releases (whichshow total traffic in the first six months of 2012 was 635 billion MB, compared to 525 billion MB in the final six months of 2011).

Counter to the CTIA’s spin, this represents growth of just 21 percent, a dramatic slowdown from the 54 percent growth in total traffic seen between the first and second half of 2011. Even more remarkably, on a per device basis (based on the CTIA’s total number of smartphones, tablets, laptops and modems, of which 131M were in use at the end of June), the first half of 2012 saw an increase of merely 3 percent in average wireless data traffic per cellphone-network connected device, compared to 29 percent growth between the first and second half of 2011 (and 20-plus percent in prior periods).

Data from Sandvine appears to confirm this slowdown, estimating mean monthly usage per mobile device in North America has fallen by 10 percent since October 2011. To be clear, these figures indicate that device owners have effectively plateaued in their consumption of cell-based data—which seems to fly in the face of conventional wisdom, informed by near constant hype of runaway data consumption by mobile consumers.

What was the cause of this dramatic slowdown in traffic growth? We can’t yet say with complete confidence, but it’s not an extravagant leap of logic to connect it with the widely announced adoption of data caps by the major wireless providers in the spring of 2012. It’s understandable that consumers would become skittish about data consumption and seek out free WiFi alternatives whenever possible. And there’s anecdotal evidence that supports the hypothesis.

For instance, in January the Wall Street Journal first reported on wireless users “shutting off their WiFi option … because constantly searching for a signal can eat up battery life.” But then by March, we were told about new iPad buyers who had started to stream March Madness games in HD only to find out the next day they were “out of gas.” In retrospect both of those stories seem laughable, since offloading traffic to Wi-Fi has become de rigueur for savvy cellular users.

Of course, such changes in behavior may not continue indefinitely, but it seems a fair bet that while caps remain a concern, end users will limit their on-network wireless data usage to a much lower level than is necessary simply to stay within their monthly cap. In addition, as others have noted, the penetration of smartphones is approaching saturation, so we can’t count on growth in the number of devices to pick up the slack.

If continued, the implications of much slower growth in on-net wireless data traffic will be profound. If traffic per device only grows at around 3 percent in the second half of this year, then overall data traffic on cellular network for all of 2012 will be up only about 60 percent on 2011— or about half the widely quoted growth forecast by Cisco. Further, Cisco justifies that number based on the assumption that the “move to tiered pricing does not appear to have an immediate effect on overall mobile data traffic.”In other words, Cisco is making what is essentially an open loop forecast of demand, unconstrained by what customers will be willing and able to afford in the real world.

Those dubious Cisco data points are widely quoted, and especially so by those trying to scare us into thinking that we face a so-called spectrum crunch—a bandwagon that CTIA has all too happily promoted. Even such luminaries as FCC Chairman Julius Genachowski has stated in recent speeches that we are at a crisis point, claiming “U.S. mobile data traffic grew almost 300 percent last year” —while CTIA says it was less than half that, at 123 percent. “There were many skeptics [back in 2009] about whether we faced a spectrum crunch. Today virtually every expert confirms it.”

Perhaps therefore we need to take a step back and think about the motivations of those who are telling us of the need for more licensed spectrum because of a purported looming spectrum crunch. Most obviously, Cisco would certainly like to sell more hardware. Large wireless operators, such as AT&T and Verizon clearly don’t want the FCC to impose caps on their spectrum holdings. Small wireless operators want more spectrum to be made available to lower the cost of network expansion.

Those who have made speculative investments in spectrum want their investors to believe these assets will become more valuable. Even the FCC would like you to believe that their “progress in mobile is driving new waves of job creation and investment.” It seems likely that the emperor really does have no clothes. We’ll have to wait to see whether wireless data traffic in licensed spectrum bands will actually meet or fall short of Cisco’s seemingly over-optimistic projections. And perhaps the leading wireless operators will be forced to soften their data caps by consumer pressure and competition from operators offering unlimited data.

However, given the dominance of Verizon and AT&T, neither seems particularly plausible in the current US wireless market. It seems rather more likely that consumers will adapt to a world of offloading instead, so that wide-area cellular networks will de facto become the backup solution for whenever short range solutions such as Wi-Fi aren’t available.

Even before the recent publicity about data caps, Wi-Fi offload was growing far faster than cellular data traffic, and according to the July 2012 PCAST report, one major carrier now claims to be offloading “more than half of its smartphone traffic onto Wi-Fi.” As the PCAST report also recognizes, low power solutions like Wi-Fi will allow spectrum re-use to increase dramatically, “from 900 to as much as 1.3 million times more than a fixed, large cell-based architecture can provide.”

Then perhaps we will realize, as others have notably pointed out, that “there is no more scarcity of wireless spectrum than there is a shortage of, say, the color purple.”

Tim Farrar is President of Telecom, Media and Finance Associates, a consulting and research firm in Menlo Park, Calif., which specializes in technical and financial analysis across the satellite and telecom sectors. 

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LTE isn’t just a faster technology, it’s a more efficient technology – carriers can pack a lot more bandwidth into any given chunk of spectrum with LTE than they can with older generation technologies. While many of you will laugh at this next statement, the large-scale adoption of LTE will make mobile data cheaper. It won’t happen immediately, and yes, most carriers will resist lowering prices with every fiber of their being, but it will happen. That’s simply the way competition works.

By 2013 we’ll have four nationwide carriers with LTE networks. Given all four LTE networks will have the same ingrained data-delivery efficiencies, it’s only a matter of time before one uses that advantage to start slashing per-gigabyte rates, thus setting off a price war. The carriers may not be saints, but they’re not idiots either. If they can halve their data plan pricing and still make a profit, they will – they just need competitive pressure to help that decision along.

Furthermore, the move from 3G to LTE isn’t a one-time bonus. LTE will beget LTE-Advanced. LTE-Advanced will beget new network topologies like small cells and heterogeneous networks (HetNets) all aimed at pumping gobs of cheap localized capacity into the network. The industry will add more parallel antennas to devices and towers, carriers will design their systems so phones can connect to multiple towers, even multiple networks simultaneously, and interference coordination technology will allow cells to be grouped together in huge clusters without canceling out each others’ signals.

With each new 4G iteration, networks will enjoy accompanying boost in capacity and efficiency. The costs of planning and deploying these networks will be enormous, but so will then increase in bandwidth available to any given subscriber. The same operational cost that goes into delivering a gigabyte of data today will deliver 10 GBs in the next few years. Ten years down the road 100 GBs could be delivered for the same price.

Why Apple is critical to this transformation

Without Apple embracing LTE that shift to cheaper mobile data isn’t going happen. Yes, LTE networks have started popping up all over the world without Apple’s help, but carriers can’t realize their operational efficiencies until they move the majority of their traffic and devices onto those new 4G networks.

The iPhone’s data hunger is ravenous. Network optimization and analytics firm Arieso estimates that the introduction of each new generation of iPhone produces a 40 percent increase in traffic over a carrier’s mobile network. If the iPhone 5’s data deluge doesn’t hit a new LTE network, it doesn’t just evaporate — it floods onto carriers’ 3G networks.

By placing even more burden on 3G, carriers would be forced to keep investing in them their legacy networks. Instead of plowing their billions of investment dollars into 4G networks, they would have to add more 3G capacity and devote more spectrum to maintaining older technologies. And once those investments are made, they’re sunk. Any megahertz devoted to 3G is going to remain 3G for the foreseeable future.

In Europe and other regions of the world behind the mobile broadband curve, a sans-LTE iPhone lessens the urgency to deploy the newest network technologies. If your single best selling smartphone model for the next nine months doesn’t support 4G, why should you? Android handset makers like Samsung should be lauded for their efforts in propping up the LTE ecosystem, but Apple was the missing, critical strut. (For a more detailed analysis of Apple’s impact on LTE check out my GigaOM Pro report on the topic, though a subscription is required).

If Apple failed to produce a 4G iPhone, LTE’s progress – and the progression toward cheaper data – would have been hindered, not just for another twelve months but possibly several years. What radios the in the iPhone includes have a big impact on CTOs’ network decisions and CFOs capital investment decisions for the next year. The wireless industry isn’t the internet industry. These are big iron deployments we’re talking about, and those decisions have long-term consequences.

It’s going to get worse before it gets better

Unfortunately, carriers have taken advantage of transition from 3G to 4G to pull some pricing shenanigans. Verizon and AT&T both recently launched shared data plans, which lets their customers pool their devices into a single plan (a good thing), but also forces customers to double down on the voice and SMS services they’ve long been abandoning (a bad thing).

Wireless Intelligence’s global breakdown of LTE subscribers

In Europe, there are indications that carriers will charge a premium for LTE access following the logic that faster connection speeds demand higher rates. It looks like carriers are milking their new investments for all they are worth, which is hardly surprising to many observers of the mobile industry. But I don’t think any of these business models are sustainable in the long-term.

It won’t be AT&T or Verizon, but we have two other nationwide operators in the US with plenty of initiative. Sprint has already extended its unlimited smartphone data plans to LTE where its customers can do far more damage than over its old CDMA networks. T-Mobile hasn’t yet released its pricing plans for LTE, but you can bet it will either match or discount the already cheap buckets of HSPA+ data it offers today (while T-Mobile didn’t get the iPhone today, it’s inevitable it will land the device). At that point we can leave it up to the market to do its work.

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I’ve always been more of a networks and technology guy than a gadget guy, so the new device launches don’t excite me the way they do my peers. What I like about CTIA is that it brings together a bunch of smart people from interesting companies who are excited by the future of wireless networking.

At CTIA I can sit down with Kyocera to discuss how ceramics can transform phone audio. Then 30 minutes later I’m chatting with the original Symbian creator Psion about its new efforts in open-source hardware, followed by a conversation with startup Mesaplexx about how a tired old cell site component–the radio frequency filter–can be transformed through advanced mathematics (more on those two in a later post).

CTIA is also a great show for measuring the progress of the industry. This year, U.S. operators started discussing small cells and the heterogeneous network in earnest, dragging it out of the labs and demo booths and into the cold light of their network roadmaps. AT&T revealed it will begin rollouts of small cells later this year, but Sprint was even more aggressive, detailing specific plans to install tens of thousands of picocells in buildings and high-traffic outdoor areas in the next two years.

Those small cells will eventually be woven into operators’ macro networks and Wi-Fi networks, creating complex HetNets that allow our devices to connect to multiple nodes – in some cases simultaneously. I don’t want to oversell the concept, but this marks a true transformation in network design, moving away from network topologies focused primarily on coverage to topologies that supply enormous sums of capacity. There are still plenty of obstacles to hurdle before mall cells and HetNet will work, but the important thing is that the operators are now actively trying to overcome them – and technologies like these make CTIA Wireless truly great.

The dark side of CTIA

But there was also plenty about the show that wasn’t so great, namely the politics and the backbiting. AT&T’s very public fight with the Federal Communications Commission carried over into the conference with FCC Chairman Julius Genachowski lashing back at Ma Bell’s accusations that the denial of AT&T-Mo forced AT&T to raise prices (check out Bloomberg Businessweek’s priceless sendup of the argument here.)

The operators took any opportunity they could to foretell the doom of the impending capacity crunch in order to justify their consolidation ambitions. And even some pettiness came out as their CEOs bickered onstage about whose network was fastest and what technologies truly constitute 4G.

While the issues behind those debates are important – the proper allocation of spectrum resources, the effectiveness and performance of different technologies –this was hardly the most elevated forum for discussing them. Trust me, not much was done to further the dialogue.

The problem is the carriers

The biggest problem with CTIA Wireless isn’t its placement on the calendar. Rather, it’s the carriers. CTIA is the trade and lobbying organization for the largest U.S. operators, so those carriers have always set the agenda of their show. That may have worked fine 10 years ago when the carriers were the be-all-end-all of mobile – when they controlled all services and revenue and were largely responsible for mobile innovation. But in recent years, the mobile industry has outgrown the operators.

Third-party developers, big Internet companies like Google and Facebook and device hardware makers like Apple are now just as important as the operators — many would argue more important. Yet CTIA hasn’t evolved to reflect that reality. That’s why the GSM Association – which has a much broader membership and mission – has managed to turn Mobile World Congress into an event of far more importance to the overall U.S. wireless industry. It’s much more inclusive.

CTIA has tweaked the show to give it the appearance of a broader tent. This year it extended keynote slots to companies like Spotify, Mozilla and Electronic Arts, but you get the impression they were being summoned to the feet of kings. Many of the biggest mobile players in Silicon Valley don’t feel they have a place at CTIA, and some long-time CTIA loyalists have decided they no longer need the event: Microsoft, Samsung and Nokia weren’t entirely absent, but none of them exhibited.

I’m not saying the operators have no place at their own show.  The dialogue about small cells and  the launch of new services like AT&T’s Digital Home initiative make the show far more significant than any mere gadget showcase. But the carriers need to lay off their agenda. They need to start talking with the larger mobile industry instead of talking at it. It would help if CTIA would eliminate the self-aggrandizing keynotes the carriers deliver every year.

Last year’s keynote panel of the big carrier CEOs was a big hit because AT&T had just announced its plans to acquire T-Mobile – antics ensued as CNBC’s Mad Money host Jim Cramer pressed them on the merger’s implications. But this year the session returned to its usual lackluster format: Canned questions from Cramer and contrived answers from four guys talking down to the rest of the industry. I didn’t write up the keynotes because there wasn’t any content to cover, but in case you’re wondering, here’s my (rather loose) interpretation of the affair (for a more detailed play-by-play check out Ina Fried’s live blog on AllThingsD):

• T-Mo’s Philipp Humm: I’m the fastest!
• AT&T’s Ralph de la Vega: No, I’m the fastest!
• Verizon’s Dan Mead: Guess how much I can bench press?
• Sprint’s Dan Hesse: LTE Rocks! [winks for the ladies]
• Jim Cramer: Everyone in the Arab Spring used cellphones to text and tweet, ergo cellphones caused the Arab Spring, ergo cellphones create democracy (ignore China). Dan Hesse, how many cellphones are necessary to create democracy in North Korea?
• Hesse: LTE Rocks! [winks for the ladies]

It’s the carriers’ party; they can cry, complain or strut if they want to. But the best parties are those where the hosts don’t make themselves the center of attention.

Blame image courtesy of Flickr user Simone Lovati

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HetNets have three major components. The first is an umbrella — or macro — network designed to provide ubiquitous mobile broadband coverage. The second is a dense network of small cells that supply enormous quantities of bandwidth in the high-traffic areas its most needed. The final component is a network intelligence that ties those networks together. According to Vestberg, the wireless industry has largely built the first and is actively deploying the second. The network intelligence is still in the works, but it won’t be long before it’s a commercial reality, Vestberg added.

There are already 1.1 billion mobile broadband subscribers globally, traversing networks comprised of millions of macro cells, Vestberg said.  Only a small subset of them are LTE subscribers today, but LTE networks already cover more than 325 million people in North America and Asia.

“We’re at a tipping point,” Vestberg said. “You build the macro networks first, but we’re soon going to have very dense networks of small cells.”

The next step is Wi-Fi, which is already being deployed as a small cell technology globally. Major operators like Japan’s KDDI, Europe’s Orange and AT&T are starting deploy dedicated high-capacity access points to offload cellular network traffic. Hotspots aren’t quite HetNet, but it’s the first step toward building a layer of small dense cells that can supply enormous capacity at low cost, Vestberg said. Ericsson has already gotten a jump on the competition by buying up metro-Wi-Fi vendor BelAir Networks, which supplies hotspot gear for AT&T and many U.S. cable operators.

Wi-Fi will soon be augmented by metrocells and microcells moving that high-bandwidth under-layer off of the unlicensed airwaves onto carriers’ own spectrum, Vestberg said. With those small cells they will be able to pack the total capacity of a macro cell into a tiny radius, and as those small cells multiply they will make once scarce mobile bandwidth plentiful.

The final component — the network intelligence to control it all — will deliver the true promise of HetNet, allowing operators to manage Wi-Fi access points as if they were any other cell and tightly integrate metro-and microcells into their network hierarchies without fear they will interfere with each other or the over-arching macro grid. That technology is already out of Ericsson’s labs and will be available in its forthcoming small cell portfolio, Vestberg said.

“I think North America will be one of the first ones to get there,” Vestberg said. “They’ve already started with Wi-Fi. They will do HetNet on top of that.”

Vestberg cautioned that HetNet is a gradual evolution of cellular topology, not a distinct network unto itself – a carrier won’t suddenly one day turn on a network of 1 million cells. The name “heterogeneous” provides a good clue on these networks will come together – Wi-Fi, home and public femtocells, pico-and micro-cells will be deployed in different stages but will eventually come together to form a larger network whole.

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FCC Chairman Julius Genachowski

The feds have teamed up with law enforcement and the wireless industry to curb the theft of cellphones by essentially rendering them useless once pilfered and fingering the thieves if they try to activate them. U.S. mobile operators will ban any phone or 3G/4G tablet reported stolen from their networks and will work together to ensure that thieves don’t simply transfer stolen devices to a competitor’s service.

According to the Federal Communications Commission, roughly 40 percent of all robberies in major metropolitan cities involve cellphone theft, with criminals specifically targeting high-end devices like the iPhone, tablets and other smartphones.  “This endangers the physical safety of people all over the country,” FCC Chairman Julius Genachowski at a D.C. press conference Tuesday morning.

The FCC will work with U.S. operators to set up their individual databases, which will track unique device identifying numbers, and with the CTIA, the major carrier trade association, to coordinate those databases, making them accessible to other operators and local law enforcement agencies all over the country. The CTIA said the database among U.S. GSM operators will be set up by Oct. 31. The trade group and its members will also set up a separate LTE database in 2013 that will span all U.S. operators networks and work with international operators to prevent phones stolen in the U.S. from being activated overseas.

There’s still one problem. The unique International Mobile Equipment Identity (IMEI) number used by GSM, UMTS and iDEN can be changed if a thief has the right equipment. Activating a stolen phone with an altered IMEI could be as easy as purchasing a new SIM card, even with the database in place. What’s more, there’s currently no law on the books making altering IMEI numbers illegal.

U.S. Senator Charles Schumer (D-N.Y.) said he hopes to change that and plans to introduce legislation that would criminalize such tampering, making it akin to changing the vehicle identification number (VIN) on a car. “If you steal a cellphone it will be a worthless endeavor,” Schumer said at the press conference. “If you try to sell a stolen cellphone you will get caught.”

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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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Now that the deal is off the table, the industry can return to solving the big question that plagues wireless in the U.S.: How the heck will operators get the spectrum and build the networks they need to support robust demand for 4G wireless services and still make money. I’ve discussed a lot of this in a GigaOM report published on Friday, when the merger looked to be heading for its demise, (sub req’d) but now that the deal is officially dead, and we know a bit more about the terms of the breakup fee, it looks like T-Mobile might be star of the wireless industry in 2012 as everyone except AT&T and Verizon try to make a deal.

Consolidation is inevitable, but AT&T can’t play

AT&T’s bid to get more spectrum wasn’t just an attempt to take out a competitor; it really did need more spectrum for its LTE network, and having T-Mobile’s AWS airwaves ready for an LTE deployment would have made AT&T’s migration path a lot simpler. As operators move from 3G to 4G services such as LTE, they are learning the costs associated with remaking and upgrading their networks are substantial. And as they look ahead to spectrum-hogging standards such as LTE-Advanced, they need more megahertz.

Verizon is tackling this through spending almost $4 billion to buy up AWS spectrum from cable companies, in a deal that poses competitive issues for the industry, but which are less clear-cut than AT&T buying T-Mobile. So Verizon hopes to be sitting pretty on up to 60 MHz of spectrum for 4G services in some major metro areas if the FCC clears its deal.

This leaves the smaller players such as Leap Wireless and Metro PCS to wrangle some kind of partnership with T-Mobile, now that it may have some of the $4 billion breakup fee and some of AT&T’s airwaves. Dish Networks, the satellite TV player  trying to become a mobile operator, has cash and the desire to be a wireless operator with T-Mobile’s help, but the history of satellite guys getting into mobile is pretty iffy.

The most interesting mobile operator to watch in the coming year might be Sprint as it faces a decision: Pursue T-Mobile; stick with Clearwire; or continue stringing along LightSquared, which plans to build a 4G LTE network but is having a hard time moving forward. When it comes to 4G, like Velma Kelly in Chicago, Sprint simply cannot do it alone. No one can, which means AT&T could try again with a more politically acceptable deal.

Today’s puzzle is consolidation without losing competition.

In a great explanation of why the FCC and Department of Justice fought back on the AT&T-Mo deal, the Washington Post’s  Cecilia Kang laid out how AT&T’s aggressive lobbying and the change in political climate in the last few months helped turn off Ma Bell’s former supporters. While industry analysts agreed the deal would consolidate a large amount of spectrum in the hands of the nation’s top two carriers, it was really unclear back  when the deal was announced in March if it would pass muster with regulators. Many in D.C. thought it was a bold move, but AT&T would win out, especially given how important spectrum was in the policy debate.

Still, AT&T wasn’t wrong when it argued the economies of scale benefit mobile operators; it currently seeks to take advantage of those economies of scale with its proposed LTE network by creating a customized spectrum band plan that would cause troubles for smaller operators. For LTE and future technologies, economies of scale will be more important because they require a large number of megahertz to deliver higher speeds. So will AT&T try to find a way to partner up with a smaller operator or tap Clearwire to act as an LTE wholesaler?

If it did, it would be a sharp divergence of policy for AT&T and would begin remaking the image of a mobile broadband provider. Under such a scenario, AT&T might become a super MVNO, piecing together elements of its own and other networks to deliver service. It’s experience with offering Wi-Fi though its Wayport acquisition might help it here. Or it could force AT&T to think differently about how it builds its network, letting Wi-Fi play a greater role than it otherwise might have.

The bottom line is that consumers want to do a lot of things on their mobile phones. Many of those things today are only available via cellular networks, but some of them (surfing YouTube, for example, or watching Netflix in the car) are not exactly the best use of licensed wireless. So, as we wait for T-Mobile to choose a dance partner and AT&T to decide if it wants to play nice with others or rethink its service offering, next year will be a much more interesting one for wireless. This year, there was a lot of movement, but not much of it was forward. Next year, though, we could see some real change.

Image courtesy of Flickr user KellBaily.

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