T-Mobile to stop offering subsidies, forcing customers to pay full price for phones

Posted on Dec 11 2012 - 11:23am by Mike Wewerka

If you’re a T-Mobile customer, or were looking to become one, you may not be too happy with the current direction that John Legere, T-Mobile’s new CEO, is taking the company. Legere took the stage in Germany this week at T-Mobile’s annual investor conference where he said that T-Mobile USA would not longer offer phone subsidies.

So what does this mean for customers looking to purchase a new phone? Well, in the simplest of terms, it means you’re going to pay the full price of a phone, up front. Typically with a subsidized phone, customers would only pay $200 for a device that may have a full value of $650 dollars. The remaining $450, is added to a customers bill over their two-year contract. For carriers, there is still a problem. Let’s assume a customer is a year into their contract, but wants to leave for Verizon. Even though the carrier [T-Mobile] may have a $275 ETF [Early Termination Fee], that fee depreciates over the life of the contract, getting smaller and smaller each month, usually by $5 to $10 a month. If a customer bails out after a year and only has to pay a $175-$200 ETA on top of the $200 initial payment and about $120 over the course of the first year, the total price that the consumer would have paid for their phone would be between $495 and $520, well below the full $650 price of the device. That loss is then passed onto the carrier, which may not sound like much, until your hear that T-Mobile lost over 492,000 customer in the third quarter this year. Even if we round that dollar amount down to just $100, the total loss would be nearly $49 million, assuming each of those customers were leaving mid-contract. Even if only half them were, that’s still about a $24 million dollars loss, in just one quarter. Granted this is just an estimate, but when a company stands to lose about $100 million, because of phone subsidies, you can see why T-Mobile is quick to axe the idea.

This is one more major thing that this new change may affect, the new iPhone. With T-Mobile now preparing to sell the iPhone in 2013, which will most likely start with the iPhone 5S in June, consumers looking to take advantage of T-Mobile’s cheap unlimited plans will have to shell out a cool $650 or more. While this type of business is nothing new to those who live Europe, it could end up back firing for T-Mobile here in the US, as they would be the only major carrier forcing consumers to pay the full price for their phones.

T-Mobile knows that not all consumers can afford to pay $650 up front, so they are offering customers two other options—aside from paying the full price up front. Consumers can bring a compatible phone to T-Mobile and avoid all costs of a new device (tons of phones can easily be found on Ebay) or they can have the price of the device added to their bill. Unfortunately, the second option won’t be added to your bill like current subsidies. You’ll still be paying the same monthly price, plus fees as before, but you’ll also be making payments on the full $650 price of the phone. You could, if you chose, pay $200 upfront like you would for a subsidy phone, to lower the cost overall, but you’ll still have to make $10-$20 monthly payments towards that phone for about 20 months, on top of your current monthly bill. The only benefit, if it really is one, is that you won’t be locked into a contract, so you can leave T-Mobile whenever you want and just sell your current phone.

This is a gutsy plan on T-Mobile’s part, they’re already hemorrhaging customers, by the hundreds of thousands and I’m not sure taking the option of subsidies away, is the best plan to keep, or attract them. It may help alleviate heavy subsidy costs, but is the cost of losing customers worth it?