Verizon, AT&T Continue To Watch T-Mobile’s Move Away From Subsidies

It will come as little shock or surprise that T-Mobile’s competition is watching their move away from subsidies, a point reiterated by Verizon and AT&T execs in Las Vegas this week. T-Mobile may not pose a large threat to the dominant telecommunication positions of Verizon and AT&T, but it’s foolish to think the latter companies wouldn’t eagerly move away from subsidies. Subsidized pricing on mobile devices has long been a catch-22 for the wireless companies, providing an easy way to attract customers all while continuing to threaten slimming margins.

As carriers make upfront payments to the handset manufacturers, it hits them right in the margin and bottom line financials which results in higher monthly service fees to offset the cost. Efforts to remove subsidies has been met with varied success around the world, a warning delivered by Tracy Isacke, director of Telefonica Digital, a Spanish carrier. Isacke called their attempts to remove subsidies in early 2012 a “disaster” and warned T-Mobile to stay away.

In an interview at the Consumer Electronics Show in Las Vegas, Verizon CEO Lowell McAdam questioned whether the US wireless industry and consumers in general are ready for such a move. Regardless of the answer, McAdam said Verizon “could move to that very quickly” if the response was positive. McAdam did call T-Mobile’s move a “great thing,” but it remains to be seen how the market will respond.

That point was also emphasized by AT&T Mobility Chief Executive Ralph de la Vega who stated his company is watching T-Mobile’s strategy unfold. De La Vega reiterated McAdam’s point — that as it stands now, there is little research to support consumers want to move away from the subsidy strategy to pay less per month.

“Our research says that they [customers] don’t like paying upfront for the phone,” he said. “There didn’t seem to be the appetite for that kind of plan.”

For T-Mobile’s part, Chief Marketing Officer Michael Sievert explained that most of the company’s new customers already choose plans that don’t include a subsidy, so they are confident in their decision. Sievert believes that when customers realize they can save money in the long run and understand how the lower cost of a device costs them more monthly, they will adopt T-Mobile’s shift in strategy. “We intend to challenge some the norms in the industry,” he said.

Wall Street Journal

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  • Zack Kennedy

    Hopefully customers in the U.S. get smart and realize that T-Mobile’s move is the way to go.

    • bisayan

      I agree! Its the reason why we switched from sprint…I hope tmobile will come on top in couple years! Lets get em tmo!

    • Anthony

      It really is though. .

      • chris

        Yes it is. I would have to pay more monthly than I do now and I would lose my subsidized phone. Right now I get subsidized phones with a cheaper plan than T-Mobile offers.

        • Wayne

          Absolutely right. My wife and I went into a T-Mo store to replace a broken G2x and got a hard sell toward a Value plan. With our 10-year old family plan and preferred data, it didn’t make any sense to switch to a plan where we’d pay more per month and have to add on the payments for the GS2 she walked out with.

          For new customers it’s fine, I suppose.

        • TBN27

          It is fine for new customers as for the plan you have no longer exists. Value plans compared to the other post paid competition is more cost effective to have.

        • mike renzo

          but the thing is.. if you upgraded to a newer phone you’d have to change your data plan to the new 5GB only plan for $35 on your older plan which makes it more expensive than a value plan – trust me – value plan is the way to go in most cases.. only time it doesnt really make sense is if you have like 5 smart phones and a corporate discount.. and even then its like a 5 dollar difference a month.. evens out without the $18 upgrade fees and all that good stuff.

        • V_i_m

          No you don’t. There are grandfathered 5GB data plans that cost quite a bit less than $35/month which fulfill the upgrade requirements. I know this because I have one.

        • hirammrom

          I have a grandfathered truly unlimited plan for only $20.

          I enjoy going into T-Mobile stores and watching them try to sell me the new unlimited 4G only to realize I already have it and they don’t understand how…

      • chris

        nevermind, I read your comment out of context.

    • nmw407

      I just hope they won’t screw long time customers who still have grandfathered plans, because for a lot of those people (myself included) these grandfathered plans are often a better deal then the value plans.

      • loueradun

        feeling the same way. T-Mobile keeps decreasing their subsidy amount for classic plans, putting us in a position where our grandfathered plans are slowly becoming more expensive than value plans.

        • BadAssBronx

          the grandfathered plans won’t change, it follows the same rule as previous plans/services provided by T-mobile. You keep what you have unless you need to make a change. But being that they will move to value plan (for new customers and customers that want to change their plans) the price of the phone would remain the same for either grandfathered plans, or value plans. The only downfall would be for grandfathered plans you would probably have to front the cost of the phone, rather than having a monthly plan available.

    • RMana12

      It’s not that customers aren’t smart about the deal. The reason why people have issues with what TMO is trying to do is because of the Contract requirements. If I am going to pay up front for the price of the phone or bring my own device, why do I have to sign a contract? If TMO says that we’ll put you in a contract only if you walk away with a brand new phone without paying a dime up front then we’ll finance that phone but until you have a balance on that device (up to 36 months) then you’ll be under contract. That’s just my 2 cents.

      • mike renzo

        thats why we have monthly 4g as well – dummy

        • RMana12

          You know what’s dummy about your comment? You have to ralize that monthly 4g plan doesn’t work the same as your post paid account. Can you roam with your 4g? I guess not… So stop being DUMMY and comparing prepaid and postpaid – DUMMY!!!

    • purenupe1

      The T-mobile EIP is only a good deal if there is no contract associated with it!!! Why a contract if you aren’t giving me a subsidy? If the monthly cost of service on a classic plan is $50 + $20 subsidy and the monthly cost of a value plan is $50 +$0 Subsidy, Then you aren’t giving me a discount on service and I shouldn’t have to commit to a contract!!! What are you giving in return for my commitment?

      • mike renzo

        sign up for monthly 4G then. bam.

  • Zach Guithues

    i jumped on the value plan as soon as it was launched. I’m still locked into the $50/month unlimited :)

  • http://twitter.com/winmoalso WinMoAlso

    Only one thing stands in the way of value plans taking off. That is hardware. If all handsets worked on all frequencies, regardless of carrier, the majority of consumers would not hesitate.

  • Akulamenuri

    Unlimited Everything on the Value Plan is $70 a month, starting January 9th you can also get Unlimited Everything on Prepaid for $70 a month. It makes no sense for an individual on a non-family plan to enter into a two-year agreement if they are going to bring his or her own device. Launching a Unlimited Everything Prepaid plan for $70 just cannibalized the potential to get these customers (meaning the ones that want truly unlimited everything) to sign a two-year agreement. Way to shoot yourself in the foot T-Mobile.

    • Turo

      For savvy informed consumers this is true, they’ll realize this quickly. Not everyone cares or is too lazy to compare these things. Plus, some see Prepaid as inferior and would not even consider looking into these kinds of plans.

      • Whiskers

        I agree , and soon you can get prepaid even cheaper when T-Mobile releases the “GoSmartMobile” service .

      • oryan_dunn

        The catch is prepaid generally doesn’t include roaming, which with T-Mobiles vast (hahahaha) network, you’ll need all the time.

      • TBN27

        Prepaid is inferior in the sense that one won’t have access to service add-ons on prepaid that they will have on postpaid. i.e. I would not be able to have international talk and text or the ability to roam overseas, which i prefer than to buy a sim card abroad.

    • http://www.facebook.com/stormcityusa Storm Millenium

      Value plans are a horrible idea for individual accounts.

      • ChristianMcC

        But who doesn’t have a friend or family member they can join with on a value plan. Saves at least $20, and if you don’t need unlimited min, even more.

        • archerian

          not many… you would need to find a friend or family member who can move to T-mobile, be stuck together on a 2 year contract and be liable for payments. My guess is a vast majority of the folks who can form family plans today already have done so (except new entrants like newly weds or add a line for a kid etc.)

  • Turo

    I hope T-Mo can gain some traction in this move and force other carriers to adopt a similar model. Unfortunately, I have little faith that the average consumer can comprehend why the same phone that AT&T sells for $150 costs $450 on T-Mobile.

    • TBN27

      I already know people that don’t like the concept.

    • mike r

      we have something called T-Charts to explain to the dumb dumbs who come in to the store.. Customer care doesnt explain it to well.. hoping they learn how to talk better

      • Chris B.

        does your t-charts, show you dumb dumb store reps how to do anything but sell? every store I go to with billing problems, tech problems, or pretty much anything not related to sells, the dealer ALWAYS calls into customer support.

  • Akulamenuri

    Double Post, sorry

  • Mike in FL

    If T-Mobile ends subsidies, it will be disastrous. The company will fold in less than 2 years. Sorry, but challenging a paradigm like this simply does not work. People are used to paying $200 for a nice phone every 2 years. It is what it is.

    • Deadeye37

      That’s where the EIP comes in. They still pay $200 for the nice phone up-front and then they have payments for 20 months on their bill (which, for high end phones, still keeps the plan competitive to what AT&T & Verizon offer with their subsidized plans). After the 20 months, their bill drops a lot and they enjoy the savings until they decide to get a new phone. If they pick a mid-range or a low-end phone (which a lot of people do), then the savings is even greater (and the down payment is even smaller).

      • Mike in FL

        The problem is that many of us are on Classic plans that are actually cheaper than the Value plans. All this move would do is remove my upgrade and have me paying more each month. No thanks.

        • Deadeye37

          I agree with you on that. I’m on a nice grandfathered plan and I want to stay on it. If they decide to move all grandfathered plans to value plans, I would be ticked. From what I’ve read, they aren’t going to do that….yet.

          For new customers, this move makes sense so long as the customers understand how the EIP works and how the whole process saves them money.

        • thepanttherlady

          I can’t imagine they would force this; however, I can see them potentially doing 1 of 2 things.

          1. Grandfathered plans upgrading being moved to Value. I think they would lose a lot of customers if they do this though.

          2. Phone subsidies will get higher. We’ve already seen this happening: Classic plan subsidies are MUCH higher than the Value plan down payments. I think this is more likely what will happen between the two scenarios I’ve mentioned.

          I’d hope that T-Mobile would still offer great deals for long time customers via retentions or the loyalty department.

        • JB

          I could see them doing #2… Classic subsides are RIDICULOUS! They only really advertise Value Plan prices anymore anyways. So most new customers are sold the Value Plan from the offset. What makes the Value Plan a hard sell is the lack of info and knowledge letting customers know how it works and the savings involved. I shouldn’t have to walk into the T-Mobile store knowing how to explain the Value Plan better than the employee.. let alone there’s no breakdown of savings on any of their in-store signage.

          Since Magenta said they want to get back to having stellar customer service, I would imagine them still offering great deals via retention. Though I envision near time for them to go live with the Value only model, the will try to convert as many Classic/grandfathered plans as possible by locking them into lower rates or special deals for converting.

        • loueradun

          I agree with #2. T-Mobile has been decreasing the value of their subsidies significantly over the last few years. Pretty much the only option is to wait for the full 24 months, and then buy from an outside retailer like Wal-mart. Otherwise you are still paying $300 for a top end phone.

        • dkbnyc

          What Classic plan is cheaper that the Value plan. Last Classic plan I had was $39.99 for unlimited minutes, $14.99 for text and $25 for unlimited data.

      • Whiskers

        Sure if you like paying T-Mobile’s inflated prices on their phones.
        You can buy the same phone from other places cheaper than what T-Mobile advertises on their sales , WTF.
        Then people are dumb enough to pay it and sign a 2 year contract when they could of just bought the phone cheaper elsewhere and not have a leash attached to them for 2 more years getting the same service through T-Mobile’s M4G or the new “GoSmartMobile” service soon to be released.

    • sidekicker89

      T-Mobile will still have sales though… like $0 down, right?? Hopefully they will have more of those so people don’t have to pay a large amount up front.

    • bob90210

      The $200 for a phone with a 2 year contract is relatively recent. Before the iPhone, contracts were only one year. I don’t think T-Mobile can change subsidies on its own but with the right combination of market conditions and new technology, the subsidy model will change.

    • BigMixxx

      How? It’s still advertised at the right price.

      This plan seems to work very well, ESPECIALLY with a full new 10 million customers coming in the next year with the METRO PCS merger/Reverse mortgage/whatever you wanna call it.

      The GREAT thing about this is that you can’t really be undercut by the competition. iPhone pricing is determined by Apple. Samsung no long would be producing crappy phones for the networks, and opens a real play at these other devices around the world. Biggest thing, T mobile reduces churn…almost immediately as the defection rate goes down fairly fast because people show more love for their phones than they show love for their cousins in the family.

      LEAST NOT FORGET: Bring your own device!

      Let’s see what we can get from expansys that’s worth it?
      http://www.expansys-usa.com/htc-one-x+android-smartphone-unlocked-237901/
      http://www.expansys-usa.com/samsung-galaxy-note-ii-android-smartphone-16gb-white-unlocked-850-1900-white-236051/
      http://www.expansys-usa.com/google-nexus-prime-android-smartphone-unlocked-16gb-224148/

      LEt’s see what negrielectronics has?
      http://negrielectronics.com/nokia-lumia-920-unlocked-black-rogers.html#.UOx2Yaxn1nU
      http://negrielectronics.com/htc-x920e-butterfly-unlocked-red.html#.UOx22axn1nU
      My hell yes device of course is: http://negrielectronics.com/asus-padfone-2-16gb-smartphone-plus-tablet-unlocked-white.html#.UOx3Eqxn1nU

      Need device protection? http://www.squaretrade.com/smartphone

      Folks the playground is open and I see the boat turning. Let the children play in the T mobile playground as much as they want…

  • RotaryP7

    Value Plans are awesome. A lot of people hate it. They get annoyed about the EIP part. Financing the phone on the bill. I just tell them this. Would you rather get a discount every month on your rate plan or once on the phone? The rate plan on Value is discounted rather than the phone itself. And the best part is, you still pay the “discounted” down payment on the phone you want.

    For those who stay on Classic. It’s the same price per month until the phone is paid in 20 months or early payoff. Some people are just scared at the “paying for the whole phone.”

    • Deadeye37

      On a few other tech blog sites reporting on this, they’re all negative towards the idea of removing the subsidy because they think the customer has to pay for the whole phone up-front. “Most people don’t want to pay $650 up-front for an iPhone”

      I think this is a big misconception on how this works that those other tech bloggers need to understand. Like you said, they can break the payments down for 20 months and a reasonable down payment and still be cheaper than some of those subsidized plans on other carriers. Once the 20 months are up, they start saving a lot more until they want to upgrade again (earlier if they pay off the phone early).

      • mingkee

        …and you can payoff early and do early upgrade.

  • Akulamenuri

    This could easily backfire. My previous post got deleted for some reason.

    • thepanttherlady

      Your post wasn’t deleted..it’s a few comments down. Disqus is sometimes slow and it takes a few minutes to show on the site.

      • Akulamenuri

        I see it, Thank you

  • gigis83

    Its bad because with this i would spend 1200 more dollars in two years. so its not good. But t-mobile is just moving out to change up to metropcs next year just my prediction.

  • lnxarepou812

    the only problem us reps are running into is the stores are talking customers into Value plans and not being completely upfront about handset purchases or pointing out migration fees and we get the brunt of the frustration from customers which completely negates the whole strategy of regaining JD Power by bringing customer trust back to the company….the faster the switch to an all Value system goes through the better for everyone

    • thepanttherlady

      How can the stores NOT be upfront? Every single EIP I’ve utilized was explained to me by the store rep…what my down payment was, what my monthly payments will be and when they’ll start. All before I even signed the contracts.

      Customer service reps need to make sure they’re educating the customer on their decision and customers need to stop playing dumb and take accountability for their purchasing decisions. Every state allows for a cancellation period. Buyers remorse? Return the phone and cancel your contract during that time.

      • 21stNow

        T-Mobile stopped cancelling the contracts on upgrades, even if the customer returned the phone. Only new customers could cancel their contracts by returning the phone. That is, unless something has changed recently.

        • thepanttherlady

          I didn’t state upgrades or new customers but should have been clearer.

          In that TMobile is supposed to be offering new customers Value plans in 2013, my cancellation comment would be geared towards them.

  • Guest

    No, I’d rather not pay full price for a device AND a 2 yr contract. I know it’s spread over

  • JustSaying

    In other news.. who’s excited about todays T-Mobile press conference at CES?!?!? I AM! :D

  • Whitney

    Well hopefully in June the iphone will be out so I can go over to value plans. I hopefully it won’t too long to launch LTE and do the cross refarm

    • bob90210

      You can buy the iPhone and switch to the value plan right now. As for LTE, it will come whenever it comes.

      • Whiskers

        Be prepared for a very spotty 1900mhz refarmed service , most of the time you will be on EDGE service and it’s slow.
        My iphone on one of my VP lines is so slow my outdated HD7 smokes it in data speed and it’s 2 year old technology .

  • lexreal

    Phone prices have to come down like the nexus project

  • http://about.me/daylondeon Deacon

    i think it’s a bad move if these phone costs don’t come down … although Value plans are much cheaper in the long run , i don’t see consumers being smart enough to know so they stick with Classic plans and new contracts just to get that upgrade .. it’s dumb i know but we’re talking about consumers here lol
    i don’t think the bulk of them are ready for buying phones outright even if it’s spread out with the $20 a month thing. they’ll have to be seriously educated on this and i don’t see that TMO has done enough to educate people on it.

  • Bradley Smith

    The issue I have on the classic plans, is if you want to save some money there is no way to do that. If you don’t upgrade your phone every 2 years, then you are paying for an upgrade that you didn’t buy. My G2 is still just fine, so I switched to the value family plan from a classic family plan and am saving about 40.00 a month.

    Personally I would prefer to buy a new phone on my schedule then on the carrier’s schedule. Which is exactly what the value plan allows you to do.

    So for all those Sprint/AT&T/Verizon (and even T-mobile Classic) customers that didn’t upgrade your phone at 2 yrs, how does it feel to be paying for an upgraded phone when you aren’t upgraded?

    • http://about.me/daylondeon Deacon

      that’s exactly true and the main reason i moved to Value . i wasn’t using my upgrade so i was just paying extra $ for nothing since i had gotten my phones for free from my “phone reviewing hobby”. i switched and i’m saving $30 a month.

      • 21stNow

        Where can I sign up for the free phones from your phone reviewing hobby?

        • ChristianMcC

          Ditto on what 21stNow asked!

        • http://about.me/daylondeon Deacon

          lol you guys are cray … it’s not something you sign up for .. email me though .. could always use new experts helping to review stuff.

      • ChristianMcC

        We’re saving $60 and now have 2 unlimited data plans amongst our 5 lines! I could not deal with the carrier locked phones anymore, either, after the G2x, vibrant, galaxy s 4g, and defy no longer being updated, granted the G2x hasn’t necessarily been written off, so our plan was to just start purchasing nexus devices.

    • Charles

      My grandfathered plan is cheaper than anything tmo has, value or classic and I still get subsidies, so it feels great!

      • loueradun

        except fighting with T-Mobile to get the subsidy on the next phone purchase… They really want these grandfathered plans to go away.

  • Kris

    Im not getting whats going on..Im not an idiot but this is all very confusing.
    What exactly is Tmo doing? Im happy with the plan I have..and Ive always paid for a phone up front. Paying over time sounds like a way for them to make more money off customers.
    Can someone explain? Please?

    • Turo

      T-Mobile is removing subsidies for phone. This means that a person coming in to sign up with T-Mo will no longer get a discounted or free phone and will need to pay the full price up front for the device or already own one they will activate service on. As a result of this, plans will cost less per month since T-Mo will not need to recoup any subsidy.
      If you choose not to pay full price up front, you can make a down payment and pay it off in installments, which is effectively the same as a subsidized model, at least until you finish paying for the phone.

      • Kris

        So its like Cricket but with down payments.

    • 21stNow

      What plan do you have?

      • Kris

        Classic 1000 min with unlimited data, and messaging.
        I was told a value plan would be cheaper for me..but I happy where Im at.
        Hard to go anywhere else and get 4 lines for 150 a month.

        • 21stNow

          When they refer to people paying for phones on the Value plan, they mean that the customers are paying full price (i.e. $700 for a Galaxy Note II). This may be all at once or with a downpayment of $300 and a $20 monthly payment for 20 months.

          With a Classic plan, a customer pays $300 with no option for an installment plan, and the monthly service fee is higher on Classic than it is on Value.

          The phone prices that I used were just examples, as T-Mobile runs many “sales” and uses mail-in rebates to offer incentives to customers. Those things will change the out-of-pocket costs from the examples that I gave earlier.

  • http://www.facebook.com/profile.php?id=100002245014425 Michael Amons

    About damn time!! A phone shouldn’t cost you your rent payment!!! This is a very good thing that T-Mobile is embarking on!!!!!!! People are tired of contracts, and it’s been long predicted that contracts would eventually begin to fade into oblivion!!!!!!!! This is also a reason why I never wanted to jump on the, “Give me a shiny phone, but be a slave to the the machine; that is a contract”!!!!) T-Mobile is about to become a prepaid company! Over there are no contract, yet they may pay more overseas for a phone, but better options, for your pocket!

    • 21stNow

      The article is about the Value plan, which is a postpaid contract plan.

  • http://www.facebook.com/tom.norman.33 Tom Norman

    Realistically, I think where this will end up doing is a further move to Nexus devices, then taking those devices to get the cheaper monthly plans.

  • Zacamandapio

    Dear T-Mobile.

    Please release a BB10 phone as soon as feasible.

    Thanks,

    Zacamandapio Tokunaga

  • alfonzso

    I’ve been on the Value Plan and paying full price for my phones for the last two years and I love it. But then, I used to pay full price before that anyway so to me it was just a gain. I hate subsidies.

  • http://twitter.com/412Central 4-12

    GUESS WHAT EVERYBODY…I’M NOT THROTTLED NOMORE!!!!!!! NO MORE 5GB CAPS!

    • Whiskers

      Yea , now back off the porn and gaming time.
      Just kidding !

      • http://twitter.com/412Central 4-12

        You reading my mind!! Haha

    • ChristianMcC

      Yeah, we made the switch a couple days ago, too, and there’s nothing but love for our new value plan. At $140 for 2 unlimited data and minutes and 500 min on 3 additional lines, it’s nothing but value.

      • http://twitter.com/412Central 4-12

        No i was on 70$ prepaid plan i was throttled until the 17th. I was on facebook and clicked a video and it loaded up in secs. I checked my account and it stopped showing 2g speed notice! Finally they made a change!

  • archerian

    The typical customer who overpays for his/her wireless service doesn’t read this blog, doesn’t (due to ignorance, marketing gimmicks or plain laziness) know what subsidies do to his/her monthly rates, believes the loudest and most colorful ad seen on TV, and thinks since the iPhone “costs” $199, all smartphones should be at that price. Its this large group that ATT and VzW know will keep them running for years. After all, ignorance is bliss. There will be takers for both subsidized and unsubsidized offerings, enough to be profitable for operators that follow either route for the next few years.

  • Sammaad Shams

    I agree but I do not like they tie you in the contract for two years. If you cancel they should just recover the cost of the phone remaining.

  • archerian

    with $300 full priced smartphones like the Nexus 4, who needs subsidies? Operators should use their clout to make smartphones a commodity, and bring the $600 devices down to 5-10% margins like PCs, and focus on network performance and customer support

    • philyew

      How would they do that? It isn’t as if the carriers haven’t been trying for the last several years to keep down their costs (irrespective of what they are charging their customers.) As a graphic example, the accounting details published by Samsung as part of their lawsuit with Apple show that all the carriers were paying them around $450 per unit for the Galaxy S2. Since then, prices have continued to rise.

      The Nexus 4 isn’t a “$300 full priced smartphone”, that’s just an example of a subsidy being paid by Google rather than the carriers – though LG may also have helped out Google with a special price as part of their deal to get an established place in the Nexus pipeline. The wholesale unit price from LG will be much closer to the amounts that TM have been charging for their direct sales.

      If Verizon and AT&T, with all their market clout, have been unable to drive down the volume purchase price of Samsung products and have been paying similar unit prices to those paid by the likes of TM, then there is still a long way to go before we see top-shelf smartphones being sold for $300 full price.

      • archerian

        you missed my point, the actual hardware BoM for a “superphone” is around $200, adding R&D costs and marketing, the cost should not balloon to 3X. There are several Chinese manufacturers (some of them the same fab units who make units for better known vendors) who can produce the same device for even lesser. Of course companies like Apple and Samsung will make hay while the sun shines, and operators will easily pass on the higher acquisition costs to the consumer. Moving to a scenario where the customer clearly pays for the device (rather than get an installment type cost transfer) will put pressure on price reduction as there will be clear distinction between handset and service. Cheaper handsets will become popular with more emerging markets driving adoption, American operators can encourage it by allowing those cheaper vendors to enter, as more consumers using smartphones ultimately translates into more revenues for them.

        • philyew

          I understand that there is a large difference between the BoM costs and the prices charged to the consumer for the devices. My point is that neither of the big two carriers, who control over 66% of total mobile subscriptions, has been able to leverage their size to get appreciably lower wholesale prices, which are the key component of that price escalation.

          The price from manufacturer to carrier is comprised of BoM, R&D, Production, Sales & Marketing, Logistics, Support and Profits, apparently adding up to around 2.25 X the BoM cost.

          The price from carrier to consumer is comprised of Wholesale, Sales & Marketing, Logistics, Support and Profits, which apparently adds up to around 1.2 X the Wholesale cost.

          Part of the problem experienced by even the largest carriers is that consumers expect a high degree of product choice. The potential sales of every device are limited not only by the size of the total customer base, but also the fact that their choices are spread across a large number of devices from competing manufacturers. As a result, a carrier like TM can remain in the same ballpark with their bigger competitors by limiting the range of choices and pushing up their sales volumes for each of the devices they do offer.

          That will all go to hell, however, if TM suddenly start selling large volumes of Apple devices without proportionately increasing their overall customer base. Their current relationship with Samsung could be destroyed.

          While low-cost competition from emerging markets may have an influence, there are only certain ways that the wholesale price can be limited: reduced profit taking, cheaper components, greater product reliability cutting support costs, and more efficient production.

          I’m sure you think that diminished profit taking is crucial, but your evaluation of manufacturer costs completely missed the cost of production, which will have hugely inflated your estimate of the manufacturers’ profits.

          I think that some of the cheaper vendors are already gaining ground in the US market, and there is still a huge, untapped market for smartphones to which they are being directed. For example, around 50% of TM customers are still using feature phones, but these folks have a very unsophisticated need for data devices. That will change with time, but until then the cheaper vendors are being directed towards producing low-end smartphones that will replace the current feature phone selection.

          For the foreseeable future, the top end of the market is being served by what is very likely to be a narrowing group. HTC are dying on their feet, Nokia haven’t made a wise choice by linking their fading fortunes only to the Windows Phone platform, and RIM are about to fade away entirely after their last hurrah with Blackberry 10 which is far too overdue to save them.

          The change will come eventually, but I don’t see the price of top-end devices dropping significantly in the next 12-18 months. It will take the existence of a readily available and reliable broadband infrastructure delivering a mix of meaningful and popular services to the significant majority of mobile customers for that to happen.

        • Guest911

          the next 1 billion adopters of smartphones will be much more price conscious than the current 1 billion. whatever the cost of production, manufacturing, sales, advertising, support etc, big vendors like Apple make 60% margins on iPhones. So of course there is immediate decrease in device cost to the consumer if those margins shrink. Whether that will happen is anyone guess, but it will happen at some time.

        • philyew

          Yes, they will be more price conscious, but they won’t be buying whatever is the equivalent of the Note 2, GS3, iPhone 5 etc etc. In the short term, they will be buying devices that most readers here wouldn’t even bother looking at, like the various ZTE devices that are now popping up.

          Companies like Apple and Samsung will certainly want to take their profits from this new market, but it won’t be with the iPhone 5, 6 or 7 and the Galaxy S 4, 5, or 6 – at least not if the naming strategy for each continues to represent a step improvement over its predecessor. Instead they will be looking at marketing cheaper devices that trade upon those devices’ cachet. The “sophisticated” end of the smartphone market will continue to pay premium prices until the device capabilities finally outstrip the market’s ability to find services that can exploit those capabilities…If that ever happens.

        • newschannel

          you forgot to factor in Samsung and Apple’s Lawyer fees, that adds around $100 per device!! ;)

        • philyew

          LOL!

        • archerian

          wow, that was a really long and interesting post :) The $200-$250 BoM includes cost of manufacture and parts, but nothing additional. The 2.25X BoM cost from manufacturer to operator, is that true for high end devices too? I’m asking as then Apple would be selling a higher capacity iPhone to ATT for around $450, and I can’t see Apple making a 60%+ margin on it with the $250 difference (which includes R&D, Production, Sales & Marketing, Logistics, Support in addition to Profits as you mentioned). Also, the 1.2X operator to consumer cost would then put the final device cost at $540. My guess is the 2.25X manufacturer to operator margin is higher. If Apple (and other high end device makers) make 50%+ margins on a device, then I don’t see any other way to bring prices down significantly for high end devices other than lower profit margins. Cheaper components certainly elp, the same $40 Qualcomm SoC costs only $20 when a Chinese fab unit makes it, perhaps there is efficiency left in production to make things cheaper too (labor is cheap, and there is a good chance the assembly lines are highly optimized). All this wont happen anytime soon, but it has to at some point.

    • ezme113

      I hear your point but the Nexus 4 is only one option. What that phone proves is one of the problems is prices need to be lowered overall. I have value and I use the equipment installment plan provided, but T mobile needs to stop adjusting the retail pricing and keep the phones at one retail price. At full price that first retail at release should only be lowered NEVER raised.

      • archerian

        I quoted the Nexus 4 as an example as its the only device that doesn’t have huge markups. As you mentioned, my point is regardless of whether its a “subsidy” or EIP, the whole question of EIP/Subsidy is since they are marked up so high. Cheaper handsets mean more market penetration and since data is a good revenue generator now, more smartphone usage will be better for the operator.

  • MadJoe

    T-Mobile hasn’t moved away from subsidizing handsets, they’ve just changed what they call it and made it a little easier to understand what you’re actually paying for your phone. You now “finance” your device over the course of a contract, and pay your normal fees + a monthly “payment” for your device until it’s paid off. Exactly what you’re doing when you get a higher priced plan, and a subsidized device, except when you’re done paying off the phone, if you don’t upgrade immediately, you’re giving away money. Verizon and AT&T absolutely thrive on ignorance and customers who give away money, so they won’t be following this trend unless they think they can get away with NOT lowering their monthly subscription prices, and ALSO charge you for your device @ full price. They will try it, and the ignorants that keep them in business in the first place, will most likely pay it. These are the same ignorants that caused activation fees to become the norm, and “upgrade” fees as well.

    • philyew

      What you say about Verizon, AT&T and their customers may well be true, but please explain to me how TM’s Value Plan arrangements amount to the sale of a subsidized phone under another name?

      If anything is mis-labeled, surely it is the idea that charging someone a reduced price for a handset and then recovering the discount (and more) through inflated plan charges is a “subsidy.”

    • MadJoe

      I should have been a fucking psychic! Those toolbags did exactly that, offered unsubsidized devices without lowering the cost of their plans and idiots are eating it up! Damn.

  • 21stNow

    I can believe that they are watching this. No subsidies but still requiring contracts has to be the US cell service providers’ dream! I might have to revolt and move all of my lines to prepaid.

  • philyew

    Every time this topic is discussed, the dire warning from Telefonica Digital is mentioned. Yes, moving away from subsidies was a disaster for them apparently, but does anyone know if they supported their change by offering an EIP?

    An obvious weakness of dropping subsidies would be forcing customers to find the full cost of one or more devices up front, but the EIP neutralizes that. If Telefonica Digital didn’t make that key play, then they really have no relevant advice to offer.

    • UMA_Fan

      Great point! I wonder if someone can find this out

      • 21stNow

        I tried to figure this out, but I couldn’t get all of Telefonica’s pages to translate using Google translate.

        • archerian

          Telefonica did offer installments, they offered 18 months interest free plans, they even offered trade-ins for existing devices.

        • 21stNow

          Thanks for letting us know!

  • TMoFan

    In very skeptical if this move towards value. Many of us have been trained to think that these phones cost $199. Even if the final bill of the same it’s a psychological barrier where a customer thinks “gee I have to pay full price for a phone” that TMo will have to break through. And att and vzw have deep pockets to subsidize and land exclusives so it won’t be a level playing field for TMo. Even though I’m skeptical I’m glad they’re doing something different. Who knows maybe this will gain traction.

  • ezme113

    Ok, what I don’t hear in many of the comments is logic. Pure logic along with the advancement of devices and applications simply doesn’t comply when comparing a grandfathered plan to what’s available now. I remember the old 3000 get more plan for $50 a month. At the time that was a great plan, because talk time was still a bigger deal than even texting. As time moved on….with the popularity of texting and increased need for internet data….many of these old plans wouldn’t be adequate to begin with. Why ……would anyone with a note 2 want a plan designed for a phone from 2005???? The main issue is subsidized phones have spoiled many into spending no more than $199, so the notion of buying the phone is foreign to them. I’m on value and the best part is having full control over when you want to change phones…..in addition to the lower monthly bill. Just knowing once a phone is paid off you can get another one if you choose. The 20 months is not set in stone folks!!
    Again, many of these so called grandfathered plans are not even fit to handle some devices. Its like comparing 500 text messages per month vs unlimited texting….

    • philyew

      Nevertheless, some grandfathered plans cannot be touched by either current Classic or Value plans. I’m fortunate enough to have one of them. However, this change will mean that in future I have to find the full up-front price for each new phone acquired, or pay a higher monthly plan price in order to benefit from the EIP arrangement.

      Had this change come before my last renewal, it would have cost me an extra $1,800 for the four new phones that I acquired for my family.

      I applaud the change in general, but there will be a number of people on grandfathered plans who will lose out.

  • BahamasGeek242

    This would be a easy sell in the U.S. if all phones were under $450 BUT they are not. We are use to paying a maximum of $250 to $300 for a phone on contract. Buying a phone at full retail for $700 will not go well with a lot of consumers

  • philyew

    While I instinctively welcome the move away from the deception of phone subsidies, there is one relevant question that I have yet to to see being asked of TM (maybe you can help out there, David): Once the Classic Plan is gone and there is nothing left with which to compare the Value Plan, how will TM demonstrate the continuing “value” proposition in a Value Plan?

  • AndroidProfit

    The Google Nexus 4 is an example of the fact that buying your own phone does work. The problem with the phone companies is that they want to keep the prices ARTIFICIALLY high for the devices. T Mobile is a PERFECT EXAMPLE of this.

    • http://www.facebook.com/stormcityusa Storm Millenium

      T-Mobile price the N4 high at retail to bait ppl in to 2 yr contracts.

      • philyew

        Huh? How does charging a higher price than Google “bait ppl in to 2 yr contracts”?

    • Guest911

      While I agree with you, Google is subsidizing the LG Nexus.

    • philyew

      All the evidence supports the conclusion that Google are subsidizing the Nexus 4 through their direct channel and LG are charging other distributors (including TM) a higher price. There were complaints over in Europe that LG was asking more for wholesale pricing from distributors than Google were charging directly to the customer.

  • loueradun

    “there is little research to support consumers want to move away from the subsidy strategy to pay less per month”

    My biggest problem with T-Mobile getting rid of their subsidies is that their value plans cost the same as my current grandfathered plan with subsidies. I wouldn’t mind moving to a value plan without subsidies if it actually saved me money each month.

  • RMana12

    In my opinion, for this move to
    work for TMO they need to do the following;

    1. If you are on a grandfathered plan and paying less than what TMO currently
    offers on Value Plan, then give the customer a $20 discount per line per month
    (unless you’re currently on a 2-year contract).

    2. When you decide to upgrade
    your phone then you’ll be allowed to use your subsidy which will remove your
    $20 monthly discount, sign a 2-year contract and you get to keep your
    grandfathered plan. After the 2-year contract you won’t be eligible for the $20
    monthly discount per line unless you switch to Value plan BUT your monthly
    payment should be whatever you’re paying before the subsidy and that would be
    the end of your subsidy eligibility.

    3. Switch to a Value plan now
    while maintaining your current monthly fee (if it’s cheaper than a Value Plan)
    and when you decide you want to get a new phone then you’ll ONLY be in contract
    until you pay off your Phone. Take off the down payment requirement and let the
    customer decide how many months they want to pay off that phone (up to 36
    months. If the customer decided that they want to pay off the phone in 36 month
    then so be it, the customer will be under contract for 36 months unless they
    have extra cash to make extra payment to pay it off early.)

    Of course, this is just my
    opinion and if TMO is really dedicated on improving their Network then I think
    a lot of customers from other provider would switch over in a heartbeat.

    • archerian

      #1 might not work as there are several users with out of contract grandfathered family plans where a $20 discount per line would essentially make the service free due to the ultra low rates

  • moises1204

    well tmobile you better stop over pricing your devices then!! if not is not going to work, as tmobile usually charges more for phones than any other carrier, be careful what you asking for tmobile!!

  • mingkee

    Value Plan is great for those customers who upgrade phone frequently.
    Under traditional phone subsidy model, customer can’t get phone discount if it wants to make upgrade in the middle of the contract. Value Plan, on the other side, allows the customer to upgrade the phone early as soon as it paid off the financing.

  • Hesster

    It seems no one in the industry likes subsidized phones except the customers who are unaware of the true cost. Carriers don’t like it because it costs them money. Manufacturers don’t like it because it gives the carriers a lot of clout over what gets released.

  • http://www.facebook.com/people/Jamille-Browne/1184321457 Jamille Browne

    If there is any carrier that can be successful with this model of business it is T-mobile because of them being viewed as the budget carrier and people want to save money.

  • T-Mobile fan

    80 percent of T-mobile customers are already on this new Value plan. If you get a Galaxy 3 you pay 89.99 for unlimited talk, text, and unlimited 4G data. After 20 months you have paid for the phone and the rate plan drops back down to 69.99. If your bringing your own device you pay 69.99 with the option to finance a phone at anytime. Very simple and a genius way for both T-mobile and the customer to save money.

  • Articool

    VALUE plans are the best options for consumers if they do not have a device to bring or love to consistently upgrade to newer phones… heres y… since you are financing that device at a resonable monthly price with the option to pay it off early and upgrade to a newer device at ANY time. Yes you pay retail price for the device over time but you also get a discounted service which beats getting a discounted phone and paying retail for service heres a breakdown for those that dont understand

    Value plan with unlimited talk, text, 4g web and insurance with gs3 ( purchased at 200) is 98 a month plus tax including being billed for the device and after i pay it off my bill becomes 78 bucks

    Classic plan with the same services and feature on a gs3 is 105 a month and i pay 350 for the same device…

    y would i pay 5 dollars more a month and 150 more upfront for the phone just to get a discount on the phone? Thats the problem alot of you are so brainwashed into subsidies that you dont see the genius of the value plan… and the reason you sign a contract is because YOU ARE FINANCING THE PHONE. if you dont want a contract spend that 599 up front and go to monthly 4g!

  • OnlineRefugee

    As I have kept saying over the past two years, the way of the future is exactly when T-Mobile is doing, go prepaid, finance phones. These two changes address the dismal economy and that people are no longer willing or able to sign two-year contracts. (People are waking up, two year contracts are a rip-off. There’s no logic to paying $3500 for a phone and service.)

    As I also said, phone payment plans have the effect of being on contract because people are not going to buy a phone on credit, switch carriers, then buy another phone on credit, etc. They will stay with a prepaid carrier because they want to pay off the phone, on payments.

    If the user wants to switch carriers, he or she will in fact pay off the remaining balance on the phone and then go to another carrier and buy a new phone on credit. They can do the same with the current carrier. They want a new phone, they can pay off the old one and get new phone on payments.

    IMO these people talking smack about moving away from subsidies are failing to take into account that the word is getting out on how lousy a deal Verizon and AT&T contracts are. One thing is certain in American life, people do NOT like getting ripped off.

    Note: it is not only T-Mobile going to phone payment plans on prepaid accounts. MetroPCS is doing that, and this was just announced on Straight Talk, paying for an iPhone 5 at $25 monthly.

    Walmart and Straight Talk Wireless will offer the iPhone 5 and iPhone 4 starting on January 11, 2013.

    Walmart said it will offer customers who purchase the iPhone in the store a no interest fixed-monthly financing offer for only $25 a month with a Walmart Credit Card. GE Capital Retail Bank is the issuer of the Walmart Credit Cards.

    (Note: IMO A mistake is to offer these phones on a credit card. People are shying away from credit cards and using reloadable debit cards. Moreover, many people have dings on their credit, to where they are embarrassed to sign up for credit, out of a dear of being declined, or assume they can’t qualify for the card.

    Plus there’s a lot of people who “go prepaid” because of the “no credit check” feature.

    There’s no need to tie a phone payment plan to a credit card and credit check. The carrier will get the money for the phone, the same as it would for the service plan. With the service plan, you don’t pay, the phone stops working. So people pay, and pay on time, unless they don’t care about the phone getting disconnected.

    The carrier can do the same with the phone. Have people agree that if they miss the COMBINED payment for the phone and service, the device stops working too. And they can tie the phone’s ESN to the payment plan, making it non-functional in the event the user tries to switch carriers and use the phone elsewhere.

  • UncleSam13

    Funny, I remember T-Mobile trying this in late 2008/2009 (November, but I can’t remember which year) and it failed miserably… which quite accurately describes them in general. Anyway, they dropped it after about 5 months or so.

  • http://www.facebook.com/unfazedrebel Jé Be (Here but Gone)

    Finally someone has to force idiots to learn math. People are so comfortable “saving” idiots you pay up front or on the backend, this saves you $ in the long run. Yea I paid $649 plus tax for a cell device same price for a new laptop(discount from $899) but I I’m also paying $30 a month. Lol don’t get sold on that $99 or free rebate devices…smh fool’s