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T-Mobile's bet: Customers will pay more for phones

A T-Mobile connected iPhone 5 is shown on display after John Legere, CEO and President of T-Mobile USA made an announcement during an event about new contract pricing on March 26, 2013 in New York City.

Number-four U.S. mobile-phone carrier T-Mobile is rolling out new pricing plans, and will begin offering the iPhone 5 (on April 12), in a bid to regain market share. It's been losing ground steadily to industry leaders AT&T and Verizon.

T-Mobile will offer plans that don’t lock customers into two-year contracts with a costly early-cancellation penalty. And it will stop subsidizing the price of new smartphones when customers sign up for service and purchase a new mobile device.

Today at an Internet café in Portland, Ore., there were plenty of hard-working smartphones on display, including builder Andy Powell’s iPhone. “I got it with the two-year plan,” said Powell. “I think it probably cost $200.”

Only, really, it cost quite a bit more. Because every month, Powell is paying AT&T a little extra to cover the company’s marketing subsidy for the phone. That’s what makes the new iPhone seem cheap at $200, instead of offering the iPhone at its actual cost of $600 or more.

“It’s a financial equation that you don’t see as a customer -- they’re not explicit with it,” says Richard Karpinski, a technology analyst at the Yankee Group. “But a company like AT&T or Verizon has fairly high-priced mobile broadband service. And what they’re doing by cashing in on those high prices, is getting back some of their marketing costs.” Subsidies fall under 'marketing' on companies’ balance sheets.

And this is what T-Mobile is trying to change, says CNET senior writer Maggie Reardon, author of the ‘Ask Maggie’ column.

“Finally we have a carrier who’s really being honest about what it costs to actually get a phone in your hand,” says Reardon. “Now people can pay for their phone up-front, or they can finance it over 24 months, and they don’t have a contract. Once you finish paying off your phone, then the cost of your monthly bill actually goes down.”

Reardon and Karpinski both say bills at T-Mobile will be lower on average than at AT&T and Verizon.

Equity analyst James Moorman at S&P says those competitors have to make up all the money they spend on subsidies with higher monthly bills. But they will be watching T-Mobile’s experiment in no-subsidy service pricing.

“If it’s successful,” says Moorman, “I think everybody would like to get rid of the subsidy model.”

Moorman thinks customers should certainly want to end the practice. “With a contract plan, you’re still paying that amount [for the subsidy] even after you’ve paid for the device,” says Moorman. “So if you don’t buy another device and you stay on longer than that two-year contract, that’s all gravy for the big national providers.”

Karpinski says savvy mobile customers -- especially those who already own their own smartphones -- may be T-Mobile’s most promising target market with the new pricing plan. “If you can buy a used phone that’s pretty high-quality for $100,” says Karpinski, “and then have total freedom and T-Mobile’s cheap rates -- it takes a little work to get to that point, but you’re getting a pretty nice bargain as well.”

T-Mobile may face a challenge convincing customers that its network service quality and coverage are up to the level of Verizon and AT&T, which have been investing heavily for years.

And T-Mobile also may have trouble finding a lot of new customers ready to plop down the full unsubsidized cost of a smartphone. Andy Powell isn’t ready to do that yet. “Whether I want to drop $600 for a phone, kind of competes with a lot of other interests at the same time,” he said. “So I’m not so sure.”

T-Mobile may find a lot of us like getting something cheap now, even if we pay more later.

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.
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Yes, but Even if this becomes a successful model for T-Mobile you know full well that AT&T will almost definitely adapt their data plans to reflect the consumer's savings at the end of a new phone's paid subsidy. Of course, if this were to happen it would really benefit all consumers of Smart Phones by providing an incentive not to necessarily upgrade to the latest gadget at the end of each 2yr. plan. Also, it would still allow those of us that want (and Need) it to continue buying new devices 'on credit', which is essentially what we are doing through our wireless carriers.

They did this in the past. About two years ago I signed up for this program, buying the phone on installment payments with a downpayment. There was still a terms of service agreement but no contract on the service. The terms were that I would have 2gb of high speed internet and unlimited slower internet thereafter and 500 anytime minutes. Roaming was to be free for both voice and data. A year later I was running low on minutes so I upgraded to unlimited minutes for more money. It was at this point that I was put on a 2 year contract with the higher price designed to lower the price of the phone, and I was not informed of this at the time. Not long after this they lowered the speed after 2gb so low that webages simply gave an error saying the server was taking too long to respond. They then limited data on roaming (almost everywhere) to 100mb per month. Then they removed roaming all together, making the phone virtually useless. I need a cell phone for work so I had to terminate service. I figured it was a good thing that I never signed a contract...it was at this point I was informed that I was under a contract I was never informed about; any changes to service (or the end of a contract) automatically started a new two year contract! Not only did I have to pay a huge termination fee, but I also had to pay the remainder of the price of the phone that I never should have had to make payments on as I was on a contract plan. They then charged me for two more months of service just for good measure. I considered class action, but the contract they had me under prohibited class action.

T-Mobile is up to their old tricks again, DON'T FALL FOR IT, THEY DON'T HONOR THEIR OWN AGREEMENTS

You missed mentioning an important feature of this plan. Many people already have a phone, that they use on other networks, that they will be able to use on this network, without needing to pay for another phone.

Following up on Dsymonds' remark: Most phones are locked, so that if you're a Verizon customer, you can't use that phone on T-mobile's network. Also, the two primary systems used by the big players aren't compatible: GSM phones are worthless on CDMA networks.

Of course, plenty of unlocked phones are available on alternative marketplaces like eBay. To really give customers some consumer choices when buying their own phones, just require all phones to be unlocked and watch those exorbitant prices plummet... just like other electronic devices (blu-ray players, flat-screen televisions, notebook computers) did.

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