T-Mobile Will End Phone Subsidies, But You'll Save Money in the Long Run

Many consumers are accustomed to the $200 price tag for a brand new smartphone that comes with renewing a 2-year contract with a service provider. What many people fail to realize, however, is that this is far below what the manufacturer actually charges, and buying the device out of contract could cost you up to three times more. But despite this startlingly high retail price, one service provider is betting that consumers will be able to see beyond the initial cost and ultimately invest in savings for the long term.

Earlier this month, T-Mobile CEO John Legere announced that the carrier plans to end phone subsidies in 2013. According to Reuters, "The move will cut T-Mobile USA's upfront costs, but Legere also expects it to appeal to customers who dislike restrictions on how often they can upgrade their phones under the subsidy model favored by bigger rivals Verizon Wireless Inc, AT&T Inc., and Sprint Nextel Corp."

Under the current model, carriers offer smartphones to customers at a reduced, or subsidized, rate. The carrier then recovers that loss by locking folks into an expensive 2-year contract, during which they can't upgrade their phones at the discounted rate. Going forward, however, T-Mobile wants to sell phones at full price, in exchange for a lower monthly rate and the freedom to change phones whenever they would like. And because $600+ is a large chunk of change to dish out at once (one of the main hurdles to prepaid phone plans, in fact), T-Mobile is also implementing an installment plan for customers to pay for new phones.

Although Legere didn't specifically say so, this alternative model is likely to involve T-Mobile's Value Plans, which charge customers the full price of a phone but cost about $20 less per month than T-Mobile's traditional talk plans. According to CNN Money, Legere mocked the old model, saying "Customers are really, still, pissed off at very unpredictable billing, very unclear pricing, restrictive and confusing upgrades, and unfair treatment of loyal customers .... This whole way that we sell them a phone and bury the costs into a long-term contract and tie them in, we think there is huge room for a challenger to change some of that."

Different, yes. But the change will also save consumers money; TIME calculated the total cost to buy the Samsung Galaxy Note II via T-Mobile's current Value Plan and compared it to the sum that you'd pay while purchasing the same phone with a subsidized plan from AT&T. The magazine found that "the total savings over two years with T-Mobile is $250... And because the cost of monthly service is cheaper, the longer you keep your phone, the more money you save."

As a possible incentive to get customers interested in this new pricing model, T-Mobile will offer the iPhone starting next year. According to CNET, T-Mobile will let customers pay a low upfront cost and make up the rest in installments. Legere said customers would pay "$99 for the most iconic device in the world" and then an extra $15 to $20 a month for 20 months.

So why make the change? If T-Mobile can woo customers away from the subsidy model the company stands to win big on their bottom line. According to Forbes, moving away from subsidies "releases T-Mobile from the potential tyranny that subsidies place on a network operator. Manufacturers still sell their device at the full ticket price, and the subsidy is a hard fought round of negotiation. T-Mobile have never hid the fact that a subsidised iPhone was not a good deal in their eyes ... now they can have Tim Cook's handset (or anyone else's handset) and the issue of network subsidy has vanished."

Ultimately, taking on the full up-front cost of a smartphone may seem hard to swallow, but if T-Mobile's new model catches on with larger carriers, the end result could be happier customers. That said, would you be interested in switching to T-Mobile for lower monthly cell phone costs? Or are you content with AT&T, Verizon, or Sprint's service? Sound off in the comments below.

Front page photo credit: CNET
Photo credits: iDownload Blog and OSX Daily