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T-Mobile battles the subsidy beast (by raising prices)

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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(s nok) Lumia 710, for an unsubsidized price of $350. Suddenly that ‘free’ subsidy doesn’t seem like such a great deal anymore.

12 Responses to “T-Mobile battles the subsidy beast (by raising prices)”

  1. PrepaidWireless Guy

    The real issue is that even knowing this, customers in North America will continue to want subsidies. People simply have no patience or sense of earning something before purchasing it. We want everything now, when we want it, and have little ability to save diligently. Even knowing they’ll pay a lot more in the long run, people can emotionally accept paying $20 extra per month, rather than save up for the upfront $300, $400, or whatever the full price of a given handset happens to be. It’s pathetic really. The fact is that if people paid more for their handsets, they’d be more loyal in the long run b/c the cost of moving carriers will be more painful. However, carriers look only at short terms gross add gains, and customers look only at what they can get today for as little money down as possible, rather than consider the total cost of ownership. Even prepaid wireless handsets have some subsidy these days for smartphones.

  2. I think this is a great idea, only charge the customers who want subsides, other users like me who half the time upgrade my handset from ebay can save money which they rightly deserve since they aren’t taking subsides unfortunately I can’t see my provider Verizon considering this option anytime soon, t-mobile doesn’t have good enough coverage for me.

  3. keninca

    The FCC or DoJ could solve this problem for T-Mo, by forcing the carriers to end their illegal bundling of equipment and service, just like they did in the 1980s with landlines. I wonder if Brodman has actually lobbied anyone in the government about this, or if he just wants sympathy from some consumers.

    • Kevin Fitchard

      Hi Kenica,

      I don’t think that’s fair, at least in the case of T-Mo. You can buy a prepaid phone or SIM from T-Mobile or sign up for buy your own device and sign up for a cheaper plan. How is that illegal bundling? People sign up for subsidy contracts because they’re some how convinced they’re a deal. Both carriers and consumers have to change their mentality if subsidies are going to disappear. But it seems to me T-Mobile is taking those steps.

      • keninca

        Kevin, T-Mo is the only company that offers a plan that doesn’t make subscribers pay for the subsidy whether they have a phone or not, and they have been steadily reducing the savings over the last year or so, as they phase out various plans (I am grand-fathered on an old plan,EvenMorePlus, that is ~$25/mo less expensive than a plan with a subsidy, but they don’t offer it any more).

        VZ, ATT, and Sprint don’t force you to buy a phone with their service, but they charge the same monthly fee whether you get a $300 or $400 subsidy or not. That is constructively bundling. They are masking the true cost of the phone, and encouraging people to buy a new one every two years.

        I am a T-Mo customer and a shareholder (in their parent company), mainly because they are better than the others, but they could do more, and that was my main point. Carriers (at least VZ and ATT) don’t want to change their mentality, because bundling favors incumbents, and they are the incumbents.

  4. Robert Wilke

    This is what I’m doing. I had a subsidized phone for 2 cycles. My last one is coming due in June. I could upgrade in April. Instead I jumped on that walmart 30.00 plan with tmo. I bought the gnex outright and the savings over time when I did the math were pretty sobering.

  5. Darthritis

    Interesting idea, but why raise rates on people who use subsidized phones? Doesn’t that just drive price conscious folks to another network? Wouldn’t lowering the cost of data plans for “bring your own phone” be better at retaining customers while increasing the perceived utility of the phone?

    The only reason I see this action making sense is if T-Mobile wants to raise data prices, because that’s where the profit is.

    • Kevin Fitchard

      Hi Darthritis,

      I see your point: Why not lower prices on the unsubsidized plans rather than raise them on the subsidized ones? T-Mobile is definitely chasing profits. That said even its subsidized plans are lot cheaper than the Big 2’s plans.

      • Derek Kerton

        Valid point from Darthritis, but what he asks has been done. Years ago T-Mo reduced prices on “Bring Your Own Phone”.

        I think the notion of raising prices on subsidy plans shows an intent to push customers towards bringing their own, or making their phones last a little longer.

        This could backfire when T-Mo wants to motivate people to upgrade hardware, for ex. wishing them to migrate to LTE. However, those kinds of motivations can be done on a very targeted basis. Individual customer could be targeted to get off inefficient phones, or a deep discount could be offered on an LTE phone in order to motivate an upgrade in times when it behooves T-Mo.

      • Darthritis

        I was strongly looking at T-Mo for a while. I had been on Virgin for 6 months to see how a non-contract plan worked. For me, it was the selection of officially supported phones that had me go to another provider. That and the AT&T merger weighed heavily on my mind.

        I hate throwing perfectly functional things out, and do want to see less phones in landfills, but I think it is best to offer incentives to bring-your-own phone users than raise prices on subsidized users. OTOH, cheaper plans haven’t worked to T-Mo’s satisfaction yet.

  6. Richard

    How can you have a customer “understand” the value of a phone when the carrier and OEM still don’t. if you want the consumer to keep the phone for more then a year then they need to provide truely timely manner for the while time they expect to have the customer use the phone. Otherwise to me they will continue to be throw away