T-Mobile's killing of device subsidies draws praise at CES

LAS VEGAS--T-Mobile USA's sharp, off-the-cuff and exuberant CEO, John Legere, seemed to be having a ball here Tuesday night embracing the role of the underdog "uncarrier." Yet as I wandered the halls and hotels of the 2013 Consumer Electronics Show, it was an earlier decision of T-Mobile's that got me wondering: what does the rest of the mobile industry think of T-Mobile's decision to do away with device subsidies?

By and large, handset makers and platform companies seem to be fine with the decision, if a little cautious. However, other carriers (read: Verizon Wireless (NYSE:VZ) and AT&T Mobility (NYSE:T)) seem to be unperturbed by and slightly hostile to the idea. This isn't exactly surprising. Subsidies distort the relationship between handset makers and customers, who often determine a device's merit based on its sticker price. And the largest carriers have benefited from the subsidy model by locking subscribers into two-year contracts.

It's obviously anyone's guess how T-Mobile's gambit will play out in the market. I personally think it's a wise move by T-Mobile that uncouples that cost of a device from the rate plan--and thus makes the carrier's new $70 unlimited plan that much more attractive. However, I heard many arguments in favor of the decision as well as a few opinions against it.

First, handset makers and platform companies like Microsoft (NASDAQ:MSFT) and Research In Motion (NASDAQ:RIMM) said the switch would not affect their relationship with T-Mobile. RIM CMO Frank Boulben, who has past experience working for France Telecom Orange, told me he has seen numerous handset pricing models, from subsidized to unsubsidized, and models where consumers actually get paid back over the life of their contract. "We can live with all the models because fundamentally it's driven by what the end user wants," he said.

"I think it's a recognition that the market is not homogeneous and that there's room for different business models and approaches, and we're encouraged that they are exploring these new models," said Greg Sullivan, Microsoft's senior product manager of Windows Phone. "It's a reflection that this is a really healthy, dynamic industry."

I would actually argue that the prevailing subsidy model is a reflection of some of the unhealthy aspects of the U.S. wireless industry, but I do agree with Sullivan that T-Mobile's break is a positive development. Low-cost handset makers seem to think so as well. "It actually makes the good phones with a good value more affordable for people and those with less subsidy more expensive," said Nicolas Zibell, Alcatel's president of the Americas and Pacific. Similarly, Zhao Wei, vice president of ZTE's U.S. handset business, said T-Mobile's move is "brave" and that it will benefit cost-efficient OEMs like ZTE. Still, he said he was unsure if U.S. consumers will accept it. "People are familiar with the subsidies," he said.

And that is the main counterargument to T-Mobile's plan. According to the Wall Street Journal, Verizon Communications CEO Lowell McAdam said he liked the idea but "questioned whether U.S. customers are ready for that type of shift because they have been conditioned to getting lower-cost phones for so long."

Similarly, AT&T Mobility CEO Ralph de la Vega said the company is looking at T-Mobile's experiment but isn't too worried. "Our research says that they [customers] don't like paying upfront for the phone," he said. "There didn't seem to be the appetite for that kind of plan."

I think there can be, and will be, as long as T-Mobile explains the benefits of decoupling the cost of a device from the rate plans it offers. T-Mobile will have to be persistent and clear in its marketing of the new plans and model. Once consumers recognize that most high-end smartphones actually cost hundreds of dollars more than what they pay when they sign a two-year contract, I think they will come to recognize the wisdom of T-Mobile's plan.

Not everyone will embrace it; some people will always want a "cheap" $99 or $199 smartphone when they upgrade. But I'm glad T-Mobile is making the switch, and many industry players seem to agree. --Phil