T-Mobile dropping smartphone subsidies is bigger than getting the iPhone

T-Mobile made lots of news Thursday, and to me the biggest piece was that the carrier is ending device subsidies. That will have a longer-lasting impact than T-Mobile getting Apple's (NASDAQ:AAPL) iPhone starting next year.

During an annual meeting with investors, T-Mobile USA CEO John Legere said that the company will switch exclusively to  Value plans next year, in which customers pay a lower monthly rate and either pay the full cost of their device upfront, or pay a fee for their device and then pay the balance of the device in affordable monthly installments. Legere did not provide all of the details, but he said that customers may be able to purchase the "most iconic device in the world" (i.e. iPhone) for $99 and then pay monthly installments of $15 or $20 over the next 20 months.

T-Mobile's decision to end device subsidies is a big step for the operator and one that I believe will be successful in the long run. Although Legere noted that Value plans have lower margins (33 percent margin) compared to T-Mobile's traditional Classic plans which subsidize devices (46 percent margin), he also said that T-Mobile will eliminate costs associated with device subsidies ($200 to $250 on average per device).

For consumers, device costs and rate plan costs will be more transparent and unbundled. Few customers who buy a smartphone for $99 or $199 when they sign up for a two-year contract fully understand that the device actually costs hundreds of dollars more. Now that T-Mobile is moving exclusively to Value plans, customers will be able to more accurately understand the cost of a device and will appreciate a carrier being upfront about it (though T-Mobile will need to do a good job of explaining the plan's structure to customers to get them to buy in). Additionally, they will be getting cheaper rate plans, which should also make the offer more attractive. 

The move away from device subsidies is part of a retooled identity and strategy for T-Mobile that I think will pay dividends next year. In addition to getting Apple devices, T-Mobile is launching a superfast 2X20 MHz LTE network next year on its 1700 MHz AWS spectrum and refarming its 1900 MHz spectrum for HSPA+ services; by the end of 2013 T-Mobile said it will have 200 million people covered with both services. 

That fast network, combined with in-your-face advertising will help T-Mobile gain traction in the market. But the move away from subsidies is really the key. Recon Analytics analyst (and FierceWireless contributor) Roger Entner said the Value plans have been popular (80 percent of sales are to Value plans now) and that if a customer stays less than 28 months the Value plan is more profitable for T-Mobile. He said that as the cost of a device goes up, the Value plans are actually better for T-Mobile since it is not paying a higher subsidy cost.

Entner added that T-Mobile's strategy was driven by necessity. "They have no other choice than to be a disruptive force. Until today it's AT&T (NYSE:T) that's been eating into T-Mobile and not the other way around. I hear all the roar. I'm still waiting for the bite. They are investing heavily in their network, but until today the budget players have been the ones who have been struggling more than the premium players."

Will other operators follow T-Mobile's lead? Entner thinks that's unlikely, at least at first. Nevertheless, I hope others operators consider moving away from device subsidies (which Sprint Nextel CEO (NYSE:S) Dan Hesse told me earlier this year was "the single largest financial challenge" in the industry).

"They're tired of losing customers so they have to try something," Entner said of T-Mobile. "Of all the carriers they have the least to lose. If you are the one who is chasing, you are the one that has to break the model."--Phil