Blog Post

Has T-Mobile really kicked off a mobile price war, or is it all just an illusion?

In the year since T-Mobile(s tmus) launched its Un-carrier campaign, it’s triggered a lot of changes in the way we buy phones and mobile service in the U.S.

Every major carrier now has some sort of upgrade program. The subsidy costs of our devices are increasingly being separated from the monthly rates we pay so we don’t get double-billed for our handsets. And many carriers have responded to T-Mobile by dropping prices on key mobile data plans.

But are we seeing a price war? I have been saying yes because I see more new options opening up in the market that allow consumers to pay less on monthly mobile phone bills or get more bang for their buck. My friend Phil Goldstein at FierceWireless, however, disagrees.

In a post earlier this month, Goldstein pointed out that the average bill for a U.S. mobile subscriber has gone up more than $5 per user in the last three years. Meanwhile, AT&T(s t) and Verizon’s(s vz) margins have barely dipped, and their profits certainly haven’t suffered. If a price war means competitive pressure, the carriers aren’t feeling it in on their bottom lines.

What we’re seeing, Goldstein wrote, is changes in pricing structure: the amount we pay remains the same, it’s just shifted from service plan to device or from data to voice. While there may be more cheaper options out there, the plans are structured in such ways that most consumers wind up paying the same rates. For an example of a true price war, Goldstein says we should look to France, where Iliad’s Free Mobile has forced dramatic price cuts in basic voice and data services.

Goldstein has definitely made me reconsider my stance. If “war” is the operative word here, we’ve really only seen a few opening shots exchanged, and neither side has suffered any real casualties. Still, I don’t think we can completely dismiss what T-Mobile has set in motion.

Two years ago, AT&T and Verizon were restructuring their pricing models through mandatory unlimited talk and text plans that actually raised rates on many consumers. They were still charging you fees for your phone even after you had paid it off. The cost per gigabyte was rising, despite the fact the carriers’ new LTE networks delivered those gigabytes far more cheaply.

Now that trend is reversing — maybe not to the extent that the carriers’ profits are suffering, but things have finally started to happen in the stagnant U.S. mobile market. What’s more, these opening volleys could escalate into the true price war Goldstein is talking about.

T-Mobile CEO John Legere kicking off the iPhone and T-Mobile's Un-carrier plan last March
T-Mobile CEO John Legere kicking off the iPhone and T-Mobile’s Un-carrier plan last March

In a recent report, mobile industry analyst Chetan Sharma said that T-Mobile has taken the calculated risk to lure in customers by lowering prices and operating at a lower margin. To keep that strategy going, it has to keep its subscriber base growing to make up for lost revenue. If and when T-Mobile’s competitors match its pricing, then the balance is restored, so to keep growing T-Mobile would have to cut its prices even further, again forcing its competitors to react, Sharma pointed out.

“In a saturated market, once a player decides to operate at a lower operating margin, it triggers the value destruction in the industry, which can be sometimes devastating to incumbents,” Sharma said.

Japan's SoftBank Corp. founder and President Masayoshi Son speaks during a press briefing to announce the company's financial results in Tokyo on February 12, 2014. SoftBank said February 12 its nine-month net profit soared 58 percent thanks to strong iPhone sales, but third-quarter earnings suffered because of losses in its newly acquired Sprint Nextel unit. KAZUHIRO NOGI/AFP/Getty Images
Japan’s SoftBank founder and President Masayoshi Son kicked off Japan’s price war and is now targeting the U.S. market through Sprint (source: AZUHIRO NOGI/AFP/Getty Images)

We’ve seen it time and time again. Reliance Communications started India’s ongoing price war in 2002. Masayoshi Son triggered it in Japan in 2008 after his company SoftBank bought out Vodafone’s operations (Son has promised to do it again in the U.S. if regulators let him merge T-Mobile with Sprint(s s)). And most recently it happened in France, when innovative broadband ISP Iliad entered the local mobile market.

So maybe we don’t have a true price war in the U.S. today, but we definitely have the makings of one, and it’s long overdue. Compared to other developed markets, the U.S. pays enormously high mobile fees (and produces the most profitable mobile carriers in the process). If T-Mobile and its confrontational CEO John Legere can erode those rates – even only incrementally – then more power to them.

7 Responses to “Has T-Mobile really kicked off a mobile price war, or is it all just an illusion?”

  1. Cameron

    Other than the fear of being locked into a contract, the maths works out very similar on many contracts vs. outright purchase and monthly plans (and it is even more expensive than traditional contracts when you opt for an early upgrade, increasing the ARPU not decreasing it in a world of early upgrades)

    Try this comparison here:

    Galaxy S4 on T- Mobile for 1GB Data is $1786 if you compare over 24 months of monthly plan and amortise the phone vs. Sprint for 1GB of data on 24 month contract is $1765 over 24 months

    or iPhone 5s

    iPhone 5S 16GB on T- Mobile for 1GB Data is $1858 if you compare over 24 months of monthly plan and amortise the phone vs. Sprint for 1GB of data on 24 month contract is $1915 over 24 months

  2. Chris McKinney

    It’s a minor price war at best and if you’ve seen any major price decreases that just means your previous plans were significantly out-of-date because all the carriers have maintained their competitive price ratios over the years.

    Just do the math. $199.99 for an iPhone 5s (16GB) or $649.99 for the same device. The difference between buying a subsidized device on contract with a higher Monthly Fee and paying full price all at once or monthly with a reduced Monthly Fee breaks even between 16-18 months depending on smartphone (worse if you upgrade earlier and exactly the same if you do it within 16-18 months).

    For now, the only time you beat the system is when you buy a new subsidized device and the second it’s out of contract get the reduced Monthly Access Fee and then keep that device as long as possible.

    The real price war will begin when consumers can purchase an unlocked device separately, realize what they actually cost, and then refuse to pay $649.99 for a top-end phone. Then we’ll have reduced monthly fees, zero contract terms, switch carriers on a whim and only pay $300 for a flagship device.

  3. Hildy Johnson

    The key to the “war” is when consumers start to separate phones and plans. I bought my Nexus 5 outright and went with T-Mobile’s “Who Talks Anymore?” plan (not its real name, but it should be) – 100 minutes of voice, unlimited texts and data (throttled after 5GB), $30 per month.

  4. War or not, I am paying less this year than last and last year paid less than the year before. In 2012 I was with VZW – $80 p/month ‘unlimited’ everything; last year I switched to Straight Talk – $45 ‘unlimited’ everything. This year I’m going with PagePlus – $30 for 1200 minutes voice, 3000 texts, 500mb data. For other warriors, check out Republic Wireless, lots of different plans from $5 to $40 p/mo (all of which require the purchase of a RW specific MotoX or MotoG)

  5. Rajiv Singh

    It’s not an illusion. Thanks to T-Mobile, I’m now paying $48 per month to AT&T whereas last year I was paying over $80 per month. My phone was fully paid off but AT&T was still gouging me. I’m so glad there is competition in this market. Thank heavens AT&T was not allowed to buy T-Mobile.

    • Selfish Leech

      You thank t-mobile but you are still with at&t. If you truly care about competition, go to the competition. If you want to thank competition, put your money there, otherwise competition will go away.