T-Mobile's no-contract model is bold and necessary - but may not change much

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Phil Goldstein

T-Mobile USA wants you to know that it's the "Uncarrier." It's moving to a no-contract model (mostly), and doing away with the traditional Tier 1 U.S. carrier model of smartphone subsidies in exchange for a two-year contract. Unfortunately, I don't think much will change in the U.S. industry as a result.

I've been on the record multiple times praising T-Mobile's model, whereby customers can either buy their smartphone outright for the full cost of the device or make a down payment and then pay for the remainder of the cost of the device in monthly installments. I still think it's a great deal (others, including Informa Telecoms & Media analyst Mike Roberts, agree). Also, T-Mobile's new "Simple Choice" plans are cheaper for consumers over the long-term if you stick with T-Mobile for two years.

Yet unless T-Mobile can effectively and efficiently market to consumers why this model is inherently better for them (and it needs to), I don't see T-Mobile changing the prevailing industry dynamics.

Why? One reason is simple inertia: As much as T-Mobile CEO John Legere calls the existing subsidy model "smartphone hell," U.S. consumers have grown habituated to it. "Is it going to change the industry? I don't think so," industry analyst William Ho told me. "You need to change the American consumer."

Another thing is that, as Ho notes, T-Mobile already has this model in place with its Value Plans and equipment installment plans. It just got rid of its contract business. (However, a T-Mobile spokesman confirmed to me that T-Mobile's "Classic" postpaid contract plans will continue to be available in national retail outlets like Best Buy and Walmart.)

Further, how much of this is really a sea change? For all of the hype, T-Mobile is essentially still working on a contract model. "While T-Mobile is eliminating device subsidies and contracts, the device financing element still serves as a contract," tweeted Current Analysis analyst Lynnette Luna.

The main difference, and what T-Mobile needs to spend its marketing dollars highlighting, is that it is providing greater flexibility than its competitors. Further, T-Mobile's plans are cheaper (starting at $50 per month for unlimited voice, texting and 500 MB of data and moving up to $70 for unlimited voice, texting and data) than the plans available through its rivals. By decoupling the cost of a rate plan from a device subsidy, T-Mobile is hoping making the service a customer receives the most important part of wireless service. "Once it becomes flat and transparent there is nowhere to hide," Legere said.

But will that concept resonate with consumers? Recon Analytics analyst (and FierceWireless contributor) Roger Entner said T-Mobile needs to play up the fact that under its plan a consumer can walk out the door with a high-end device like Apple's (NASDAQ:AAPL) iPhone 5 for $99.99, compared with $200 at other Tier 1 carriers (T-Mobile customers must still pay monthly payments of $20 for 24 months after that). "Where it can move the needle for them is that the new iPhone 5 is $99," he said. "That is the hidden gem in that whole plan. Everything else is a new paint job."

John Marick, the CEO of Consumer Cellular (an AT&T MVNO) told me that he has been selling a hybrid, no-contract postpaid model for a long time and that what T-Mobile is doing is "certainly not very revolutionary. It's a major shift for a Tier 1 carrier though. I think the biggest challenge for T-Mobile is that they are trying to change the perspective of the mass consumer market."

How can it do that? Yankee Group analyst Rich Karpinski acknowledged that "it's a really tough marketing challenge." Customers are still going to need to compare prices between carriers, which can be complex, so T-Mobile needs to show its savings simply. Karpinski also said in order to break through, T-Mobile will need to emphasize certain subtle aspects of its plans, including the fact that customers can trade in their existing phone, get the fair market value and use that money toward paying off the rest of that device or to purchase a new phone. And once customers pay the cost of a device (in full upfront or over time), their monthly bill drops.

At the same time, T-Mobile will need to emphasize to traditional prepaid customers and customers who want to bring their own devices that its network is fast and reliable. (While T-Mobile's HSPA+42 network covers 225 million POPs, its LTE coverage right now is scant. T-Mobile plans to cover 100 million POPs with LTE by mid-year and 200 million by the end of 2013.)

"They have a lot of different points they can hit on," Karpinski said. "It's a story they have to tell well, and they have to tell it to these different segments and do it well enough to move the numbers significantly enough to improve their bottom line."

It's a tall order, and T-Mobile and Legere seem up to the challenge (what other option do they have?). But it's a big challenge nonetheless. --Phil