T-Mobile Ditching Subsidies Doesn’t Fix the Contract Problem

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T-Mobile USA recently announced a plan to get rid of handset subsidies. On the surface this sounds like a great idea, but before we get into the pros and cons, we need to understand how “subsidies” and “standards” really work.

Standards Rule!

The GSM standard allows you to put a SIM into your phone, and as long as it’s activated by its carrier, you’re online. Globally, that’s how it works. In America, not only do we have phones that support limited bands (and may not work across all carriers), we even have two different standards for voice: GSM and CDMA.

In an ideal scenario, phones would support the most common frequencies so they could be used across the majority of carriers. They’d also be unlocked, so switching carriers would be as simple as swapping the SIM and rebooting the device. The deck is stacked against interoperability. Why?

It’s in the carriers’ best interests to limit the bands their phones support. Doing so theoretically saves money in the radio circuitry, but it also physically limits a customer’s ability to take their phone to another carrier — since another carrier may not operate on the same frequencies. This makes switching from one carrier to another either cost hundreds of dollars more should the customer opt to purchase an unlocked phone, or requires them to enter into another multi-year contract to get a phone “free” or “cheap”.

Subsidies Drool!

In a subsidized arrangement, it’s the norm for carriers to offer smartphones, tablets, and other devices at a reduced price (or even “free”) when you sign up for their service. The trade-off of doing so is signing a contract that forces you to stay with the carrier, typically for two years. After a year or so has passed, many carriers will allow you to buy another phone at the reduced price — but you’ve got to renew your contract for another two years. Carriers can afford this because they build the cost of the device into the service that you’re paying for. Think of it as a rent-to-own arrangement. Again, in the USA, this is just how our cellular carriers work.

In a subsidized arrangement you’re essentially paying for the phone bit by bit each month as a part of your monthly payment plan. If you don’t like it and want to get out of your contract early there are usually significant early termination fees — sometimes hundreds of dollars.

By now half of you are wondering why I’m going into such detail about the way things are and have always been. The other half are scratching their heads and saying “those crazy Americans!” For both groups, yes, that’s how it works here, and no, that’s not how it works “everywhere else”.

T-Mobile’s Move is Bold — and Stupid

Now that everyone understands how carriers in the USA work, let’s take a look at T-Mobile’s new plan. Under their current proposal, T-Mobile would be offering better monthly prices when you bring your own phone. They’re doing it, presumably, to attract customers from other carriers with better prices. Unfortunately, they’ve got a couple problems.

Problem Number One: People Expect “Free” or “Cheap”

Thanks to years of subsidies, the American cellular customer has become accustomed to “free” and “cheap” cell phones. We’re also becoming increasingly unfamiliar with the concept of “freedom” when it comes to choice — since our choices are limited to whatever our carrier tells us we can have. Thrusting this new-found “freedom” on their customers may be too unfamiliar a concept for widespread adoption.

Problem Number Two: It’s Still Too Expensive

T-Mobile realized they’d have customers who are used to the the subsidy game, so they offered a hybrid: unsubsidized plans with monthly handset payments as a separate line-item. Unfortunately, the reduced cost of the new plan isn’t as much as the monthly cost of the handset. In other words, customers will pay more doing it this way.

Problem Number Three: It’s Still a Contract!

One of the major advantages of an unsubsidized plan is the freedom that comes with it — or should come with it. Unfortunately, the new T-Mobile unsubsidized plans still rope you into a contract with an early termination penalty. This negates one of the very freedoms that eliminating the device subsidy should have brought!

How Could T-Mobile Make it Work?

Carriers are always experimenting with new plans. Some last a long time, others go away after only a short amount of time. T-Mobile will undoubtedly do the same with these plans.  How could T-Mobile make their new plan better?

Price

Obviously, prices for the unsubsidized plans have to be lower than the cost of the subsidized plans. They also have to be lower priced than the cost of the plan plus the monthly device purchase payment (currently $20). Not just nominally lower, these prices have to be low enough to entice customers away from their current carriers to T-Mobile’s new plans.

Separate the Devices

T-Mobile could do away with the “device” issue completely by partnering with another company to sell devices compatible with (but not necessarily branded for) the T-Mobile network. This company could offer financing so the cost of the device would be separated from the cost of the monthly service.

Ditch the Early Termination Fees

With this plan, T-Mobile no longer has to worry about recouping the cost of a subsidized device, so early termination fees are no longer valid.

Once T-Mobile has these three fairly simple problems resolved they need to shout it from the roof-tops! Their ad campaigns should focus on the fact that they’re so confident in their network, speeds, and service that you can bring your own device, pay less for service, and if you don’t like it, you’re free to go somewhere else at the end of the month.

Our international readers can vouch for this arrangement, since that’s probably the set up they have at home. Of course us Americans are eager to hear your input and experiences, so please don’t leave us hanging! Let us know how you think cellular carriers should work and what American carriers are doing wrong in the comments below!

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Samsung Galaxy Note II Giveaway Contest, Question 5: How big (in mAh) is the battery that ships with the Galaxy Note II?

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About The Author
Joe Levi
Joe graduated from Weber State University with two degrees in Information Systems and Technologies. He has carried mobile devices with him for more than a decade, including Apple's Newton, Microsoft's Handheld and Palm Sized PCs, and is Pocketnow's "Android Guy".By day you'll find Joe coding web pages, tweaking for SEO, and leveraging social media to spread the word. By night you'll probably find him writing technology and "prepping" articles, as well as shooting video.Read more about Joe Levi here.