By Jim Karpen on Sat, 12/08/2012
One of the more interesting tidbits in the past couple days was T-Mobile's announcement that they'll be offering the iPhone next year — but with a difference. They'll not offer subsized phones, like the other carriers do, but instead will either charge full price or will lease the phone to their customers.
T-Mobile is the only one of the four top carriers in the U.S. to not yet sell the iPhone. Their reasoning is that they can't afford it. The carriers pay Apple the full price for an iPhone up front, say $600, and then sell it to their customers for $200. They recoup their loss by requiring a two-year contract and charging a high enough monthly fee that they eventually recover their upfront cost. The result is that when a new iPhone is released, and the carriers sell a ton of them, they'll often report a loss in that fiscal quarter. But they're willing to take this loss because they know that they'll eventually make their money, thanks to the two-year contract.
T-Mobile didn't like that model though, and they've always said they can't afford to sell the iPhone. So when they do sell it next year, they'll be selling it unsubsidized. But at the same time, their monthly plan will be significantly lower. This is, in fact, how it works in most countries other than the U.S. People pay the whole price up front, but aren't then locked into a contract and have a much lower montly cost. T-Mobile's announcement said that next year they'll be eliminating all subsidized phones from their offerings and will completely switch to this other model.
While we won't know the details of T-Mobile's offering until next year, the announcement, which came during a talk by CEO John Legere, suggests that a T-Mobile iPhone could cost in the neighborhood of $650, the same as Apple's subsidized cost. But T-Mobile's "Value Plan" for unsubsidized phones runs around $20 cheaper than that for a subsidized phone.
However, Legere said that T-Mobile will offer an unusual option for their iPhone customers who don't want to pay the full price up front: they'll lease the phone to the customer. They'd charge $100 up front and then lease the phone for $15 to $20 per month. And that wouldn't necessarily be a new phone. Legere said they'll also be selling refurbished phones.
In some ways, it's hard to tell the difference between T-Mobile's leasing model and the model of subsidizing phones, given that in both instances the customer is paying less money up front but has a higher monthly cost. But Legere indicated that there are a number of advantages. For one thing, the costs are transparent: you know exactly how much you're paying for your phone and for your phone service. The costs of the phone aren't buried in higher fees within a two-year contract. Further, you aren't locked into a contract and upgrade cycle. You can upgrade your phone whenever you want.
Also, in some ways T-Mobile's approach is simply a continuation of what they're already doing. They currently have 1.7 million customers who are using unlocked phones. These are either phones that customers have bought for full price from Apple or are phones that carriers have unlocked after the two-year contract was done. And, I suppose, some phones that are "jailbroken": that is, phones unlocked by users themselves rather than by the carriers. But the difference, Legere said, is that some T-Mobile customers don't want to buy a phone elsewhere and then use it with T-Mobile. If they're going to use T-Mobile as their carrier, they want to buy their phone from T-Mobile.
Given all the headaches that surround the standard, two-year contract approach, I think it's great that T-Mobile is completely switching to unsubsidized phones. Already 80% of their customers opt for their unsubsidized Value Plan. It's a good thing if the industry offers more options.