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

By Marcy Bonebright, dealnews Senior Staff Writer

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

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Jon Cue Publik
Yes, Yes, Yes, I am very interested in switching. I think the subsidized model sucks. It makes more senes to pay outright or on an installment loan for the phone. I hope this non-susidized model will take off. We pay too much for mobil phones and contracts. You can go to most Asian countries and find the cost substantialy lower and much more advanced then our own. It is time for the carriers to stop taking advantage of the American public because they can. I for one will be switching to T-Mobile!

Tired of being fleeced...
Its naive to think that the carriers wont ramp up the price to current subsidized rates once they get the consumer used to not getting a subsidy.
I have been a T-Mobile customer since 2001. I have been in locked contracts with them before that cost a bundle. This time, we wanted to get new phones, and with , a better deal. After shopping the market, we found that paying full price and getting better rate plan will save us a lot of money, so we stayed with T-Mobile, at a cost savings of 60% of what we were doing before. In Europe, full price phones are the norm; then you just choose your carrier. This resembles the deregulated model natural for natural gas: up front maintenance charge, then buy from whomever you want at a negotiated price. Will cell service follow? Not for awhile.
Check their "brand new" plan pricing - interestingly prices have increased. Smells like a bait and switch plan to the uneducated.
T-Mobile has already been offering this option in pre-paid form or "bring your own phone." I see the biggest hurdle here being customer education. All they are really doing is separating out the subsidy from the cost of the plan. The other problem is that they currently don't price their unlocked phones competitively.
Case in point is the LG Nexus 4. It's significantly cheaper to buy this phone from Google than from T-Mobile, which makes no sense at all.
I currently pay $60 a month with an unlocked iPhone. That's Unlimited Talk/Text and Internet (up to 2gb). That same plan on ATT (albeit with 3gb of data) is $120 a month plus tax and fees.
2 years of ATT with 64gb iPhone = $3280
2 years on T-monile with unlocked iPhone = $2289
Savings = $991 <--not chump change
Furthermore my phone is unlocked from day one so I can use local SIM chips overseas and I can easily dump it on ebay if I want to get cash and update in advance.
I predict this won't go far in this economy unless phone prices come down drastically. This is akin to the $50 LED light bulb. People are use to being able to go out and get 4 lightbulbs for $1 and be done with it for a few months until they need them again. Dropping $50 PER BULB every few years is just something they aren't accustomed to, but not PREPARED FOR. You shouldn't have to save up for the utility of a simple light bulb!
Similar instance here - only we're talking $500+ every time you want a newer phone. Most people upgrade because the contract allows for it with a steep discount. Without that... they'll keep their phone longer, IF they can. My guess is, the carriers already have some behind-the-scenes deal to make it so they offer new or upgraded services that will REQUIRE users to purchase new phones to receive them, driving the market artificially. There's money in this for them SOMEWHERE - you can bet on it.
I've been off contract for several years now and by my own choice was able to give up discounted phone pricing for lower monthly billing. So in that respect this option has been there for several years. Being off contract means I never got discounted prices if I wanted to upgrade my phone but yes, in the long run I came out ahead as long as I kept my phone longer than 2 years. If you replace your phone more often then you might loose on this business model depending on the price you pay for your phone. I've always thought phones were overpriced anyway so I resisted upgrading, to my benefit.
Lindsay Sakraida (DealNews)
Yes, unlocked phones have been around for a long time, but T-Mobile is the first service provider to announce that they will cease offering any subsidy plans whatsoever. Its users will no longer have a subsidy option, even if they want it.
How is this news? Apple has been selling unlocked iPhones for years. All manufacturers do. Most people are just too lazy to do the math.
Hopefully that means more unlocked offerings in the future. I will not be renewing my Verizon contract since they cut unlimited on all upgrades.
Hope T-Mobile flourishes with this business model. Can't stand the Big 2.
Thing is, though - once the two years of subsidy is over, do the cell carriers actually reduce your bill accordingly? Not in my experience, the monthly rates stay the same. What they need to do is charge the reduced rate for service and clearly state an additional $x per month for x months is being charged for the phone subsidy - and no-one does that.
Ending phone subsidies will only help with individual account users. Phone subsidies do help though for family plans, where you might have as many as 5 phones subsidized for two years.
The big flaw is that they are still requiring contracts. If I have to pay full price for a phone, I don't want to be stuck in a contract.