by Kate Pearce
Enter T-Mobile’s bold move on Thursday. The scrappy carrier made the first move in the industry to change how the game is played (and perhaps how consumers view their devices). Yes, T-Mobile, the one that was nearly gobbled up by AT&T, shocked the US wireless world last week with news that they would no longer subsidize smart phones (adopting more of a European model). On the same day, T-Mobile announced a deal with Apple to sell their products, the last of the major carriers to do so. The subsidy announcement, however, nearly over shadowed the much-anticipated Apple news.
The US mobile industry may be in for some big changes. In the short term, end users will see some stark pricing differences: a T-Mobile non-subsidized, unlocked iPhone 5 could sell for $700 (full price) vs. an AT&T subsidized and locked version for $199. This out of whack pricing may look favorable to AT&T but T-Mobile’s monthly pricing will be lower so customers pay more upfront for the device (customers also have a choice to pay for the device in installments) but pay less in monthly fees. Time’s Tech section gave a nice summary using the purchase of a Samsung Note II and T-Mobile pricing:
- The full price of the phone, without a contract, is $650.
- Under T-Mobile’s Value Plan, you can pay full price for the phone plus $45 per month for basic service, which includes 500 voice minutes, 2 GB of data and pay-per-text. The total cost of ownership over two years is $1,730.
- If you pay in installments, the up-front price is $250, plus another $20 for 20 months. On top of that, the cost of service is still $45 per month, bringing the total cost of ownership over two years to $1,730.
- AT&T subsidizes the Galaxy Note II for $300 with a two-year contract. The cost of service, at minimum, is $70 for 450 voice minutes, 3 GB of data and pay-per text. The total cost of ownership over two years is $1,980.
- The total savings over two-years with T-Mobile is $250.
Historically, handset subsidies were needed early on in the industry to encourage mobile phone adoption. (A handset subsidy happens when a wireless carrier sells a phone or handset below cost with the idea of recouping the loss later on customer usage fees. The amount of loss per handset is called the subsidy.) However, the US mobility market is nearly fully penetrated, and with smart phone adoption at 50%, many believe subsidies have become a financial headache for carriers.
From a Reuse and Recycling perspective, they have been used so much that customers have a skewed sense of value (in a recent Compass Intelligence survey, we asked smart phone users to value their devices—47% said they were worth between $25-$100) as well as an expected short life span of their devices. In fact, some industry pundits believe that subsidies are partly to blame for what’s being called a “throw away” consumer electronics culture. Subsidies have kept the upgrade cycles short and the perceived value of the device low.
There are other major changes in store if the US industry moves toward a no subsidy model. As many analysts have pointed out, carriers lose more control over the device (it still has to go through certification but may not have skins and other carrier-created content). Also, many consumers may be happy to see increased device financing (from the carriers, OEMs and 3rd party retailers) and more smart phones entering the market, which is good for Nokia (Lumia is a lower subsidized device) and the Chinese OEMs, but not good for Apple. The carriers may see this as a step closer to the dreaded “big pipe,” but they still own the customers (and all that comes with them) via the billing relationship.
Finally, we understand there is a ways to go before real traction is made and whether the other carriers will even adopt a new model (AT&T is looking at lowering subsidies). Some analysts have even said that the major carriers will go head-to-head against T-Mobile pricing. Plus, we can’t ignore that the 4th largest carrier in the market has struggled lately. However, the move to a more responsible industry—both financially and environmentally—is an exciting one. We are anxious to see how this will catapult device reuse (and recycling) closer to center stage. As we've said before, the hottest device out there may just be your gently-used smart phone, but you may not want to keep it in your back pocket or let your two-year old play with it.
Kate Pearce is a Sr. Consultant and Research Strategist at Compass Intelligence. She has a long tenure in the wireless industry, working in corporate strategy, business planning and product development groups at a major telecom provider for nearly 15 years and as a consultant for two years. If you want to contact Kate, she can be reached at email@example.com.