Although customers will pay higher upfront costs, they'll actually save hundreds over the course of their contract
Ever since AT&T walked away from a deal to acquire T-Mobile last year, T-Mobile has been struggling to define itself and win over customers — and it hasn't helped that its lineup did not include the iPhone. But that's about to change: Speaking at the Deutsche Telekom's analyst conference this week, T-Mobile CEO John Legere revealed a long-anticipated deal with Apple that suggests it'll finally bring the iPhone to the fourth-place carrier, as well as a dramatic new pricing structure that does away with traditional phone contracts.
First some background: Most phone carriers sell their devices using subsidies. Customers pay attractively low upfront costs for the phone itself, then cough up relatively high monthly fees to pay for voice, text, and data service. "Basically you're paying a mortgage on your phone," says Kevin Fitchard at GigaOm. T-Mobile's new "Value Plan" flips this traditional pricing structure on its head: T-Mobile customers will pay a steeper price ($650 to $850) for an unsubsidized iPhone 5 rather than the $200 subsidized price available through AT&T or Verizon. In exchange, T-Mobile customers will pay a much lower monthly fee over the course of their two-year contract, saving them a healthy chunk of change in the long run — up to $1,000 dollars during a two-year span.
Of course, convincing customers to take the initial plunge may not be easy. That said, T-Mobile already offers an optional version of this proposed Value Plan that accounted for 80 percent of its activations last year. But now it's shifting to the unsubsidized model entirely and — the really big news — applying it to the iPhone. Or nearly entirely: T-Mobile is also kicking around the idea of a financing plan for an unsubsidized phone. After a down-payment of $100, for example, consumers pay for the device over a 20-month stretch. In terms of monthly costs, this option wouldn't differ much from traditional contracts.
What advantage does this Value Plan offer new customers? Other carriers like Verizon are using subsidies to strong-arm consumers into its confusing new shared data plans; T-Mobile appears to be positioning itself as the no-nonsense carrier with clear, easier-to-understand contracts, at least relatively speaking.
Another advantage is that customers who don't want a top-of-the-line device — or who can snag an unlocked iPhone or top-shelf Android for cheap elsewhere — should be able to sign up for T-Mobile's contract with their existing unlocked device, subverting expensive upfront costs while giving them more flexibility. (Obviously, T-Mobile would rather you paid the high unsubsidized price, but remember: Its priority is snaring new customers, at least for now.)
One last thing: Countries in Europe already use T-Mobile's unsubsidized model. Perhaps if U.S. customers find the service's Value Plan attractive, AT&T, Verizon, and Sprint will take note.
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