The company is shifting fully to a “Value Package” model with unsubsidized phones, transparent pricing and lower cost data and voice plans. This flies in the face of the traditional approach employed by the industry, where new phones are subsidized by carriers and the cost of the subsidy built in to a two-year contract.
And as with any fundamental shift in how consumers are charged for a service, there are going to be winners and losers. Let’s take a look at how consumers, wireless carriers and smartphone manufacturers should fare:
When one company makes a bold move that shakes up its industry, consumers often come out ahead. Additional choice tends to be a good thing. Besides, companies don’t usually makes changes to steal customers from rivals with a new business model that leaves them with the short end of the stick.
But don’t take my word for it; let’s take a quick look at the math. T-Mobile offers an unlimited 4G data plan with unlimited talk and text for $69.99 per month, but the customer has to fork over $649 if they want the cheapest Apple (NASDAQ:AAPL) iPhone 5. Over two years, the total cost is around $2,328.
AT&T (NYSE:T) will give you that iPhone 5 for $199.95 on a 4G network with 5GB of data (no more unlimited data plans), unlimited text messaging and 450 minutes of talk time for $109.99 per month. Over two years, that’ll cost $2,840.
By forgoing the $450 subsidy from AT&T and forking over the full iPhone purchase price, the consumer ends up saving over $500 over two years (in addition to having a better plan). Plus, if that upfront cost is a budgetary hurdle, T-Mobile is offering monthly installment plans to defray the purchase price.
In the end, that makes it a big win for consumers.
So if consumers win, will mobile providers lose?
Well, T-Mobile is certainly risking a hit to its revenue by forgoing the extra money it would be making through subsidized cell phones. The assumption is the company will make up the difference on volume. According to GigaOM, 80% of T-Mobile activations last quarter were of the unsubsidized Value Plan variety, so the demand could well be there for the plan to work.
But what about the other mobile network providers? Will they be under pressure to adopt a similar strategy? Well, AT&T, Verizon (NYSE:VZ) and Sprint (NYSE:S) didn’t exactly go into panic-mode after T-Mobile reintroduced unlimited data, and I expect a similar wait-and-see approach to this new development.
Plus, it’s more than likely that most customers will shrug and choose to continue with the subsidized plans that made for painless upgrades to new iPhones every two years. After all, Apple itself sells unlocked iPhones and there hasn’t exactly been a stampede to Apple stores to snatch them up.
And even if the big three decide to offer a similar plan to remain competitive, I don’t expect a full-scale switch away from subsidized plans or a hit to the carriers’ bottom lines.
When it comes to the downside, the big losers could actually be Apple, Samsung and company — the manufacturers of premium smartphones. These companies derive huge amounts of revenue from smartphone sales. The iPhone generates two-thirds of Apple’s profit, for example, while Samsung’s smartphone division profits bring in a similarly over-sized chunk of its total.
On top of that, those sales are driven in large part by carrier subsidies because they hide the upfront expense of premium smartphones (which tends to be between $650 to $850) and because they make it easier for customers to upgrade to a new version every two years.
But if more carriers switch to transparent pricing and/or end subsidies? Well, Apple in particular could be in danger since it lacks the full range of phones that competitors like Samsung offer. Consumers may just skip the premium-priced iPhone and instead settle on a more basic Android version that does most of the same stuff for a fraction of the cost.
When all is said and done, T-Mobile may pick up some customers out of its “Value Package” model — heavy data users, customers who have no qualms about forking over big bucks for a smartphone and super-consumers who research and act on bargain pricing — while business as usual should mark on for the big three carriers.
But premium smartphone makers — especially Apple — will be watching any new developments closely. If unsubsidized phones do gain traction, it could make a serious dent in profits.
As of this writing, Brad Moon didn’t own a position in any of the aforementioned securities.