t-mobile logo Axel Schwenke/Flickr

T-Mobile is changing its mobile phone subscription model by 2013. In gist, the carrier will only offer Value Plans, and it wants you to buy smartphones at full-price rather than go for a subsidized phone.

The pricing model for mobile service in the U.S. has traditionally been subsidy-based. Phones are free or cheap because the carrier pays for the phone upfront. As such, you can get a $650 smartphone cheap or for free, but the carrier will recoup this investment by adding on to the monthly charge. This cost is imputed into the plan, though, and is considered a hidden charge. T-Mobile wants to change this by 2013, as they start offering the iPhone for the first time.

T-Mobile is finally offering the iPhone, but unlike other carriers, the telco will offer it to customers at cost. Tmo will start pushing only its Value Plan offerings, and will no longer offer Classic Plans. Value Plans are about $20 cheaper per month for the same service than its classic ones.

But why the move away from subsidy? T-Mobile offers the following benefits.

  • Tmo says this will encourage “BYOD” or bring-your-own-device setups among customers. You can simply go for a plan with your existing unlocked smartphone or tablet if you choose to.
  • This will also encourage device upgrades even without having to wait for contract to mature.
  • The new plans are also meant to help customers appreciate just how expensive smartphones are. These are $650 to $800 (or more) devices, after all. With “free” offers, users tend to feel these are just throwaway devices, when in fact they’re paying for it in their monthly bills.
  • With subsidies, consumers continue paying for the subsidized cost of the phone even after the contract has expired. With non-subsidized phones, users pay only for the services they use.

T-Mobile will not just let users bear the full cost of devices outright, though. The mobile provider will continue offering Equipment Installment Plans (EIP), which lets users pay for the device cost in monthly installments for 20 months, which will depend on how much the phone will cost (usually a downpayment plus $5 to $20 monthly).

In an investor call, T-Mobile CEO John Legere says this move is expected to appeal to customers who feel limited by carrier restrictions on upgrades because of their subsidies. It also means that customers get to save in the long run. “We think there is huge room for a challenger to change some of that, in a way that the larger players will not be able to or will choose not to respond to,” Legere said, expounding on the current subsidy-based business model that most carriers are following.

$20 multiplied by 24 months is $480, after all — an added cost that you’re probably better off using toward the purchase of a new phone or for your device installments.

Is this a good move on T-Mobile’s part? Are American consumers ready for a radical change in mobile phone pricing?

J. Angelo Racoma
J. Angelo Racoma has written extensively about mobile, social media, enterprise apps and startups. Angelo develops business case studies for Microsoft enterprise platforms, and is also co-founder at WorkSmartr, a small outsourcing team that offers digital content and marketing services.