Feature Article

December 07, 2012

T-Mobile USA to End All Device Subsidies

T-Mobile USA says it plans to end all device subsidies in 2013, after finding that perhaps 80 percent of its customers choose a "bring your own device" or "buy your own phone" plan anyway.

To ease the "sticker shock," T-Mobile USA probably will offer installment plans that involve an upfront $100 payment and then monthly payments for as long as 20 months. 

Image via Shutterstock

T-Mobile USA will also apparently get the right to sell unspecified "Apple" devices in 2013. To be sure, the "value" approach fits T-Mobile USA's approach to the market. But there is risk.

In Spain, mobile service providers have had very mixed experiences with ending device subsidies. Vodafone Spain and Telefonica lost customers after they stopped subsidizing devices.

In fact, Vodafone Spain lost a half million subscribers in a single quarter. Vodafone Spain later reversed course and restored  the subsidies. T-Mobile USA will find out soon enough if different results can be obtained in the U.S. market.

Vodafone and Telefonica, with almost 70 percent market share between them, suffered huge subscriber losses since they decided to use Spain as a test case for a new business model that cuts subsidies for smartphones.

Vodafone has lost over 600,000 mobile clients in a month or two after the policy change. Telefonica's Movistar lost 572,000 in April 2012 and May 2012, according to data from Spain's telecoms regulator.

It is no secret that mobile service providers globally want to reduce the amount of money they spend to subsidize smartphones for their customers.

The problem is that the subsidies raise operating costs, and thus affect cash flow.

Of course, it can be argued that such subsidies also provide value, in part by reducing customer churn, as consumers often must sign contracts to qualify for the device subsidies.

Some would argue that although there is a positive churn reduction effect, the amount of reduced churn is only 27 percent of incremental subsidy cost for AT&T and 45 percent for Verizon.

This means AT&T is actually losing more than $2 billion by providing iPhone subsidies, for example, while Verizon is losing nearly $1 billion. Verizon's "losses" are lower because it has sold fewer iPhones than AT&T. Over time, that gap should close.

Mobile service providers aren’t happy about the cost of device subsidies that cause a drag on earnings. For AT&T, the financial impact of iPhone subsidies is clear. AT&T profit margins had grown for five straight years beginning in 2005, but reversed in 2010, apparently related directly to iPhone 4 demand and subsidies, BTIG argues.

BTIG argues the iPhone subsidies have reduced AT&T margins by at least 10 percent in 2011, for example.

But the trick is how to wean customers off the subsidies without seriously slowing the smartphone adoption rate, since most smartphone customers, given a choice, buy subsidized devices, with a contract, rather than paying full retail price and buying service without a contract.

T-Mobile USA aims to challenge that notion.

Edited by Brooke Neuman

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