‘T-Mobile USA Plans to Ditch Phone Subsidies’

Sinead Carew reporting for Reuters on changes coming for T-Mobile:

Under the unsubsidized model, Legere said customers will be able to upgrade their phones when they want to by trading in the device. T-Mobile USA’s bigger rivals have been restricting upgrades to keep their subsidy costs under control.

This is going to be fascinating to see how it works. For one, will customers truly be willing to pay more upfront in order to have lower monthly bills and no commitment contracts? I personally don’t think they will be willing to pay more upfront.

For most people it simply doesn’t make sense to pay more upfront because most users won’t be upgrading yearly. Most users want a really nice device, really cheaply, and they are willing to wait in order to get that.

A 16GB iPhone 5 on contract with any of the three largest carriers in the U.S. will set you back: $199. For that you probably will pay $80-100 a month and be stuck paying that for two years. If you want to upgrade you will have to pay a different price, which is typically calculated based off of a pro-rated system. So if the subsidy is $450 over two years, to upgrade in one year you will likely have to pay $225 more than the subsidized price of the phone. Makes sense.

Most users then just wait two years. Apple knows this, and that’s why they use the same trick BMW (and others) does: not changing the visible look of the device substantially every year. (BMWs typically look the same for 5-8 years, with only enthusiasts being able to tell the subtle changes. Thus you can remain happier with your BMW for longer because you still feel like you have “the current model” — which is what Apple is doing too. Your phone and car don’t instantly look old the next year.)

Now, the unsubsidized price of the iPhone 5 16GB? $649. Yikes.

In order for buying a new unsubsidized iPhone to make financial sense, you would want your monthly bill to decrease by $20/mo. That makes it a wash from a pricing standpoint.

T-Mobile has cheaper plans, and it sounds like they will reduce the monthly bill further for those without a subsidy on their device. Also T-Mobile will be buying back old devices. So theoretically you could probably get a new iPhone for the upgrade price of $199 if you account for the lower monthly bill and the buy-back. You’d still pay the higher price, but aggregated overtime it would not be more expensive.

HOWEVER, that’s not how the consumer mind works — consumers don’t use that logic. The general consumer is illogical — they have a want 1 and they fill that want without using a spreadsheet to determine what the best value is over time. So in the consumers mind they walk in and choose the device based on sticker price: AT&T sells it for $199, T-Mobile for $649.

T-Mobile loses every time.

I apply this logic all the time with renting apartments. Renters don’t look too much at the monthly cost, they look directly at the initial cost. So if my deposit is cheaper and I give them the first month free — they’ll typically pay $100/mo more than a competing rental unit.

Why is this? Most consumers don’t have the cash to pay a lot upfront. So for them, often, the only way to get the things they want is to find it for as cheap as they can initially and not worry about long-term costs.

It’s hard to explain to a consumer that they save money long term, when most consumers are just focused on the immediate: “If I buy the best long-term deal, I can’t order pizza for dinner tonight, or tomorrow.” And thus, they buy the cheaper one because they can get two things they want right now: pizza and a new phone.

So T-Mobile might find a winning solution with savvy and smart consumers, but that’s a much smaller group than the general consumer base. Overall: this isn’t a great idea for T-Mobile — then again they don’t have much to lose either.

  1. Not a need.
Originally posted for members on: December 7, 2012
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