Also-ran T-Mobile gambles on new strategy

(MoneyWatch) Wireless telecom companies have long helped consumers pick up the costs of buying a mobile phone. So when a company like T-Mobile announces that it will end such phone subsidies and make its customers pay the full freight, it's a big change. 

Rocking the boat is a risky move, as people have become accustomed to getting the latest in technology either for free or relatively low cost. lt could be a gamble that pays off, both in attracting consumers and, more broadly, in emboldening carriers to push back on hardware vendors and to stop hiding the true prices that their customers pay.

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T-Mobile's motivation is clear. The company has been an also-ran in the U.S. market, ranking No. 4 in what for now is largely a two-horse race between Verizon Wireless and AT&T (T). As a result, T-Mobile is looking for a boost. That likely won't come simply from offering service on the latest iPhone, which is only an attempt to keep too many customers from moving to other providers so they can use an Apple (AAPL) device. What T-Mobile needs is a clear reason for consumers to go with its service and not one of its competitors.

Unmasking the secret phone price

The true price of mobile phones has been effectively hidden from consumers. Even a more expensive smartphone typically costs no more than $199. But the actual price tag is much higher. In total the average iPhone runs about $650, for example, with carriers that sell the device kicking in the difference.

But that subsidy only happens up front, with consumers eventually paying the full price through higher monthly service costs and additional data plans. All told, consumers can easily find themselves spending thousands of dollars over a two-year period.

What T-Mobile hopes to do is make phone pricing transparent. The company has service plans that include unlimited voice and messaging as well as 2 gigabytes of data. Here's a price comparison from blog Digital:

As a baseline, a T-Mobile Value plan with unlimited voice, unlimited messaging, and 2 GB of "high speed" data runs $60 a month; over 24 months that rolls out to $1,440. Verizon charges $100 a month for a roughly equivalent plan ($2,400 a year), AT&T is $85 a month (for just 1 GB of data a month; $2,040 a year), and Sprint is $80 a month ($1,920 a year, although voice is limited to 450 minutes).

This analysis isn't entirely correct. The costs for the other carriers is for two years, not one. Still, over that period of time, T-Mobile would cost between $480 and $960 less than its competitors for equivalent service.

Industry shake-up?

Then there is the cost of a phone. Say you went to T-Mobile for the newest iPhone, with its total average cost of $650. Tacking on the $199 price that most of carriers charge for the device, the cost differential over the two years would rise to between $679 and $1,159. In other words, using T-Mobile becomes anywhere from marginally cheaper to a lot less costly. And the company also bills for the phone over time, reducing up-front costs.

That said, people are addicted to what seems free, even if it costs more in the long run. Spanish carrier Telefonica stopped subsidizing phone purchases earlier this year and lost almost 640,000 subscribers in the second quarter alone.

And yet if T-Mobile can get some traction, this move has the potential to upset business as usual among carriers. None of them like paying large sums to handset vendors. That is especially true for Apple, which has demanded more money, leaving carriers to underwrite some portion of the handset costs. That makes it hard for carriers to compete on price.

If such a change happened among carriers, it could also device manufacturers, with price becoming a much bigger part of competition. That could further advance Google's (GOOG) Android platform in its battle with the iPhone.

[reelly1]

T-Mobile stock price? They are not even publicly traded.

[Marc Jellinek]

Here's the real risk for T-Mobile: Loss of contract customers in favor of pay-as-you-go.

The only benefit to a 2-year contract with T-Mobile is the phone subsidy. Once your initial contract has expired, you are simply paying more for the same service T-Mobile offers under their Monthly 4G.

Example for unlimited voice and text, 2 GB data
Contract Price: $80 per month per line
Monthly 4G: $60 per month per line

In the end, a contract only gives T-Mobile an extra $240 per year with no benefit to the consumer.

What to expect from T-Mobile's stock price? As T-Mobile loses contract customers (who are locked in for 2 years) and they convert to Pay-As-You-Go customers; the market will acknowledge that those customer relationships are less "sticky" and drop the price of the stock.

It also takes T-Mobile into an area where they acknowledge they are no longer competing with AT&T, Verizon and Sprint and are more in competition with second-tier providers like Virgin, TracPhone and MetroPCS.

I find it interesting this occurs right around the same time T-Mobile is getting the iPhone, which requires a $400 (or more) subsidy to remain competitive with the Big Three.

The only thing in T-Mobile's favor on this deal is fragmentation within the US mobile telecom market. AT&T and T-Mobile have compatible networks. Phones that are useful with T-Mobile's network will not work with Sprint and Verizon, which use different technologies. So while customers can switch, they are limited in who they can switch to.