T-Mobile's No-Contract Revolution
The nation's fourth-largest wireless carrier may have been the last to the iPhone party, but T-Mobile may end up being the first to show consumers what it really thinks about contracts. By offering a no-contract iPhone 5 that can be paid off per month, T-Mobile is betting its service quality will win over customers. Apple, meanwhile, may be the long-term winner if this becomes a trend.
Mar 28, 2013 5:00 AM PT
When new T-Mobile CEO John Legere was trash-talking the cellular service competition by characterizing their contract plans as "bullsh*t," it took me a couple of days to realize there was far more to his new no-contract iPhone plan than gleeful profanity.
Despite being late to the Apple party -- T-Mobile is the last of the big four U.S. cellular service companies to offer the iPhone -- the company might be the only one to create meaningful change.
Essentially, T-Mobile is letting its customers buy an iPhone 5 on an installment plan. They can pay US$100 upfront, then pay $20 for the next 24 months for a total of $580. This is slightly less than an unlocked and contract-free iPhone 5 purchased directly from Apple for $649.
What's the Big Deal?
While it's been possible to buy iPhones outright in the past, it's been more of a grudging back door affair on the part of the carriers. In addition, when you bring your own smartphone to the table, as near as I can tell, most monthly service plans stay essentially the same, which means you might as well buy the subsidized iPhone with the contract because you're going to pay the same monthly costs anyway.
Buying from Apple, then paying the same rates as everyone else on a subsidized contract plan -- without the contract -- makes little financial sense.
By removing the subsidized contract plan, and connecting the dots between the cost of the iPhone and what the consumer actually pays, T-Mobile suddenly makes it very clear what you're paying for each month. That's downright amazing -- at least in America.
Twenty dollars is for the iPhone 5. Got it. Makes sense. The rest is for the service. Better yet, if you don't have to have the latest and greatest iPhone every two years -- if you can squeak three or more years out of your iPhone -- you're not overspending on the device.
I know several households that have iPhone 4s that are still in use well past 24 months -- but the monthly cellular service costs haven't changed. This is gravy for the cellular service providers, pure and simple.
What's Wrong With Cheap Phones and Contracts?
Contracts are an important part of business. As T-Mobile hopes to prove, however, they don't have to be -- just because a segment of the population likes free, obscure and locked-in plans doesn't mean the whole tech-using world does.
More to the point: T-Mobile isn't hiding behind smoke-and-mirrors deals and packages. T-Mobile is actually allowing people to consider T-Mobile as a service, and let the service quality compete for their business rather than imposing a contract.
T-Mobile has other challenges, of course, such as coverage in rural areas and 4G LTE rollouts in major markets. If a consumer isn't confident that they'll get the coverage they need, they won't take advantage of T-Mobile's no-contract plans. In my opinion, though, T-Mobile could become a fantastic catalyst for change in favor of Apple, above and beyond the potential to save money.
Price and Value Connected
I would say most consumers have little idea what it would cost to simply buy a smartphone outright. T-Mobile is a consumer-facing company, which means T-Mobile is teaching consumers about the real cost of a smartphone.
This cost will work in Apple's favor. If an iPhone 5's flat cost is actually less than a comparable smartphone from another manufacturer, this will be perceived as good for Apple. Because Apple's reputation is for high-quality products, even if the price tag is higher, it will only reinforce the expectation of quality as reflected in the price.
Ironic, I know, but Apple wins right now in the U.S. because of the reputation it has spent years building.
If a competing Android smartphone has an upfront price tag of $350, that would be good, right? Not necessarily. It could just shout out to a costumer that the $350 smartphone is a "cheap" model of subpar quality. When the "cheap" model is obscured by carrier contract "deals," consumers might get into a competing smartphone without a real price-based thought trigger.
Here's a better way to say this: If price isn't murkified by subsidized contracts, price becomes a decision factor, a relative measuring stick. Right now, I think price tags will favor Apple in the U.S. by customers who can handle basic math, even when the price is higher than the competition.
Case in point? The iPad and iPad mini.
Cell Service as Utility
There's a long-term shift here, too. If Apple can retain the benefits of the carriers, but unlock the iPhone from the carrier so that the carrier is seen more as a service provider -- like water, electricity, or household internet -- Apple could gain.
What happens when there are a bunch of iPhones out in circulation and suddenly they don't need overpriced data plans? What if they only need a few cellular minutes? What if the iPhones could be easily used with only WiFi for data? What if they could be used for WiFi calling only instead of relying on carriers?
I like FaceTime. I have an iPhone 4 that sits on my shelf as a backup iPhone in case I drop my iPhone 5 in the toilet. I'm unsure what to do with it, but I know that I don't want to pay $300 a year to AT&T to give it a line of service with a small data plan. T-Mobile opens up the possibility of cheaper service plans in the future.
If I could get this iPhone 4 into the hands of a teenager or grandparent without paying $25 a month, or adding it to some high-priced family data plan, there would be another iOS device in circulation using Apple's iTunes and App Store. Long-term, I think Apple gains here.
While T-Mobile isn't the largest player in the U.S., it's big enough to spark change -- I hope. The worse case scenario is that we all start getting a bit more clarity into what our smartphone and mobile device services actually cost.
And that's no bullsh*t.