T-Mobile USA: The latest canary into the subsidized-smartphone coalmine

A growing number of Western European carriers are moving away from handset subsidies in favor of leasing and financing plans, as my colleague David Meyer reported earlier this week. Nearly 30 operators have dropped subsidies for at least some users, according to new data from Informa Telecoms & Media, sacrificing the benefits of long-term service contracts in exchange for cutting the cost of customer acquisition.

Coincidentally, Informa’s report came just a day before T-Mobile USA sent out invitations to a media event next week where the beleaguered operator appears ready to announce some innovative new plans. T-Mobile will drop annual service contracts for consumers, according to Gotta Be Mobile, and charge an initial payment of $99 for high-end smartphones to be used with prepaid plans. Users will pay the balance of the handset price over the first year, enabling them to pay only the prepaid service fee once the phone is paid off – and in turn freeing them to upgrade under the same program any time.

The jury is still out

Despite those recent moves, though, it’s far too early to say that the days of smartphone subsidies are numbered around the world. They’re actually on the rise in the Far East, in fact, increasing the cost of doing business for every major carrier in China and many in smaller markets in Asia. They’re driving smartphone penetration across Latin America, where mobile broadband subscriptions account for roughly 20 percent of overall mobile connections. And while tier-one carriers in the U.S. continue to whine about the costs of subsidizing smartphones, T-Mobile is the only major American operator aggressively experimenting with alternative models. (It’s worth noting that T-Mobile continues to struggle while the nation’s two biggest carriers – namely Verizon Wireless and AT&T – are doing very well with the subsidized-handset model.)

And while doing away with subsidies will surely lower carriers’ cost of acquiring new customers, it’s not at all clear that refusing to subsidize smartphones is winning strategy for carriers in Western Europe and the U.S. – at least not yet. Spain’s two biggest carriers stopped subsidizing new smartphones last spring, but both Telefonica and Vodafone Spain paid a particularly hefty price as that country’s economy continued to struggle last year. (Vodafone abandoned the experiment after only six months, while a Telefonica executive has predicted that T-Mobile’s move to drop subsidies will be a disaster that will encourage its competitors “to go for the jugular.”) Eschewing the subsidization model appears to have worked for a few upstart service providers in Europe, but not for larger, more established operators.

No easy answers

For carriers in advanced mobile markets, then, the question of whether to subsidize smartphones isn’t an easy one to answer. Deep-pocketed operators like Verizon and AT&T can continue to pay the hefty upfront costs of subsidizing high-end smartphones, biding their time while they wait for any clear trends to emerge. And prepaid players can stick to tried-and-true strategies of asking users to pay a more honest price for a handset, then simply buy their voice and data usage in monthly buckets or as they go.

Service providers who fall between those two groups should experiment with a variety of different models. T-Mobile may regret its move to completely dump subsidies, but asking customers to make monthly payments on their smartphones provides an opportunity for the carrier to explain to consumers the value of separating handset costs from monthly service charges. On the other hand, carriers should consider factors like retail distribution and user interface when considering subsidizing handsets, sometimes paying the upfront costs for top-line handsets over which they have the most influence. And they shouldn’t be too hasty to do away with those lengthy contracts that have become their bread and butter. Because while subsidized smartphones and lengthy contracts can effectively disguise the true price of modern devices, they’re still a crucial piece of the business model for many operators.

Relevant Analyst
Colin Gibbs

Colin Gibbs

Founder and Principal Peak Mobile Insights

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