T-Mobile and MetroPCS - Does the Merger Make an Illogical Case for Unsubsidized Smartphones and iPhones?

By Tony Rizzo December 07, 2012

OK, here is a somewhat different take on what T-Mobile is hoping to do with its just announced, innovative, ground-shaking, game-changing (their words, not ours) announcement that it will no longer subsidize the cost of mobile devices for consumers.

At a very recent Deutsche Telekom analyst conference, Deutsche CEO Rene Obermann and T-Mobile USA’s new CEO John Legere, announced a bit of a shocker: that beginning in 2013 it would no longer offer subsidies on its smartphones (and presumably on any other mobile devices it might choose to offer). There are two immediate kneejerk reactions to this sort of news:

  • It’s about time – now we’ll finally know the real cost of our data network plans!
  • Worst move on the planet – North Americans will never stand or such a thing!

Are either of these the right reaction to what T-Mobile (which is owned by Deutsche) intends to do once 2013 kicks in and the smartphone subsidies end? Before we answer the question, let’s get a few issues out of the way.

Image via Shutterstock

First, T-Mobile has not had a good last few years. It continues to lose customers, has failed to get itself on the iPhone train (our belief is that T-Mobile simply can’t afford the price, by which we mean the cost of the subsidy it would need in order to compete effectively). Where the company is not losing customers, and may in fact be gaining customers is in the area of lower cost “value plans” the company offers, which keeps data plan costs low and more or less factors phone costs out of the equation.

Now here is the interesting thing – MetroPCS is also effectively a “value plan” company. Prior to the merger agreement (which has not yet been approved by the federal government, but which we expect will easily be approved) MetroPCS was ranked in fifth place behind Verizon, AT&T, Sprint and T-Mobile with 9.3 million wireless subscribers. T-Mobile currently has 33.2 million customers, leaving a combined entity with approximately 42.5 million total wireless subscribers, which none the less still leaves the combined company in fourth place on the list.

Rene Obermann, Deutsche Telekom’s CEO, specifically noted the following two things at the time of the merger announcement:

  • "The merger means we are here to compete, we are here to unlock value and we are here to win. This deal has the potential to be a game changer, and will create the leading value-focused wireless carrier."
  • “The T-Mobile and MetroPCS brands are a great strategic fit - both operationally and culturally. We are committed to creating a sustainable and financially viable national challenger in the U.S., and we believe this combination helps us deliver on that commitment.”

Of note, given the “operational fit” Obermann stresses above, the two companies currently use different network technologies. This means that mobile devices from one company will not work on the other’s.  Ordinarily, this would be a mountain of an issue, but the saving grace that makes the deal possible is that both companies are now in the process of deploying the same 4G LTE technology, which will make the networks compatible – and ultimately makes the deal do-able. Obermann noted that the companies have a common path to 4G LTE in many areas and that existing MetroPCS customers will be migrated to a common LTE-based network as they upgrade their handsets.

Note the words we highlighted earlier: The deal “…will create the leading value-focused wireless carrier.”

This specifically means that the value-focused business plan model is what Deutsche and T-Mobile are placing their entire merger bets on. We have no doubt that the strategy not to subsidize mobile devices going forward in 2013 was born at that time and comes directly from the much larger value data plan approach the merger now allows. Legere notes that in 2013 T-Mobile will move to a 100 percent data plan model (currently, about 80 percent of T-Mobile’s subscribers are on value plans).

During his presentation, Legere noted that the merger accelerates the “no subsidy” strategy, and allows the company to (we’re paraphrasing slightly) “make big, bold moves that will shake up the industry and change some of the age old approaches we’ve had in the US wireless world.”

No Subsidies – Smart or Painfully Illogical?

What is the alternative financial incentive to unsubsidized mobile devices? The answer sounds simple: cheaper data plans! These are the value plans that we’ve referred to above, which T-Mobile sees as its key growth area. With the addition of MetroPCS, which relies entirely on them, it positions T-Mobile to own a much larger share of this market. No, the approach doesn’t move the needle on T-Mobile overall – it remains solidly entrenched as the number four US wireless carrier, and we see no way for T-Mobile to ever move beyond this positioning. But T-Mobile has the plan in hand for new business – read on.

What it will likely do however is ensure that T-Mobile will always know its device costs – essentially zero. Customers will either:

  • Buy and pay for in full for their own unlocked devices up front (whether through T-Mobile or a third party), which is a common approach in much of Europe.
  • Bring devices in simply as BYOD (although T-Mobile doesn’t yet offer the iPhone, 1.7 million of them have made their way onto T-Mobile’s network through BYOD).
  • In some form or fashion pay for devices on a monthly basis throughout the data plan contract period. For example, Legere notes that T-Mobile will likely directly sell the iPhone for $99 up front, then charge you an extra $15 to $20 per month over 20 months to pay off the rest of the device. Other far more affordable devices would require no upfront costs and smaller monthly payments.

We’re leaving out a lot of detail here, and we definitely recommend listening to an available video of Legere’s entire presentation (there are lots of presentation slides of the sort analysts love to read through). There are lots of details on how it will all work financially – including ARPU projections and a discussion of why T-Mobile’s management team believes AT&T subscribers will be prime targets for conversion to T-Mobile customers.

We can say that the question that needs to be answered – and isn’t - is whether or not potential subscribers (note, we are not referring to existing subscribers, but to those that T-Mobile needs to attract in order to grow its business) will be attracted to T-Mobile’s value pricing which includes true unlimited data plans and unsubsidized mobile device approach.

It is a tough call. There is a heavily ingrained psychological paradigm in the United States – get that new phone cheap and hey, the data plan seems reasonable. That last piece of it is really the problem. In the grand scheme of things, most consumers and businesses (which in most cases negotiate their prices with the carriers) are perfectly happy with the data plan costs and level of services they get. Churn is never as bad as the word itself makes it out to be and most users don’t find saving a few dollars worth the hassle of changing networks.

That isn’t to say there aren’t a lot of new people entering the workforce and having to finally pay for their own mobile services that would not be attracted to the T-Mobile approach. Building market share in this grass roots manner makes a lot of sense, but it doesn’t happen overnight. It will take some time.

A value plan and unsubsidized phones doesn’t necessarily suggest a bargain – it suggests to us that there is a cheaper alternative for those who can’t play in the big leagues (a “bargain” means an alternative that is both cheaper and lets you play in the big leagues) – in huge part it is a major perception issue that established subscribers with Verizon and AT&T, we believe, hold on to. We simply don’t see a lot of churn resulting here that will see AT&T or Verizon customers going over to T-Mobile.

T-Mobile will need to figure out how to build its marketing messages to attract a younger audience that is not affluent but that is now beginning to earn discretionary income. They will like the whole approach. Building a customer growth base in this manner leads to loyal customers (assuming T-Mobile also manages to gain and retain their trust over time) that will in turn recommend T-Mobile. The tried and true Net Provider Score strategy certainly points to this approach.

It won’t matter to AT&T or Verizon – Sprint we’re not as sure of – in today’s market. But five years down the road we may very well see a significant change in the landscape of mobile users. If the change does indeed occur – that is, if T-Mobile has in fact chosen its path wisely and with true foresight – then the rest of the wireless carrier world will have no choice but to move in the same direction.

Hmm – are we ready to shell out $649 to $849 for an iPhone 5? Damn it, we aren’t. It’s too illogical!

For another very interesting perspective on T-Mobile’s approach, be sure to check out TechZone360 CEO and Editor in Chief Rich Tehrani’s latest blog post.

Edited by Brooke Neuman

TechZone360 Senior Editor

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