T-Mobile’s decision to promote contract-free plans seems to be off to a strong start. The fourth largest wireless carrier in the U.S. announced recently that it has sold as many as half a million unsubsidized iPhone 5 units in less than a month since it started selling on April 12. If the monthly sales run rate holds, T-Mobile could be looking at almost 1.5 million iPhone unit sales in Q2, about as many as Sprint (NYSE:S) sold last quarter. Considering that Sprint has a larger postpaid subscriber base than T-Mobile and that the latter is wandering into untested waters with the unsubsidized iPhone, this could be an incredible feat for the beleaguered smaller carrier.
The initial demand for the unsubsidized iPhone might be a sign of the looming threat to the duo of Verizon (NYSE:VZ) and AT&T (NYSE:T), both of which have been highly successful at using their deep pockets to corner a big portion of the market with subsidies and postpaid plans. If T-Mobile’s radically new contract-free plans gain more ground in the coming quarters, it could force a major rethink on the part of the bigger carriers and have serious implications on overall dynamics of the wireless industry. It must however be noted that these are still early days, and the initial demand might just be due to the high pent-up demand that had built up for the smartphone at the carrier and not the no-contract plans.
Contract-Free Plans Are Cost-Effective For Subscribers
T-Mobile’s new data plans seem like a very good value proposition for subscribers who do not want to lock themselves to a carrier’s network for two years. Not only are the plans cheaper (from a two-year perspective as well) but also much more flexible than traditional postpaid plans in the sense that subscribers can switch carriers without having to pay a penalty and are only liable to pay for the handset installments the rest of the period. In this sense, the carrier is also being a lot more transparent with the pricing structure by locking subscribers only to the subsidized handset and not to its service.
But therein lies a big risk to the carrier. Subscribers make carrier choices not just on the basis of service costs but also network coverage and data speeds; so the onus is on T-Mobile to aggressively invest in its network and retain subscribers it attracts with its new plans. The arrival of the iPhone on T-Mobile has also plugged a big hole in its handset armory and should help it stem subscriber losses that it has been experiencing due to the lack of the popular phone.
These moves are part of a broader bid on T-Mobile’s part to regain focus and position itself as an attractive cheaper alternative to the larger carriers after its buyout attempt by AT&T failed to pass regulatory approval in late-2011. T-Mobile has also made plans to acquire MetroPCS and is building out a LTE network to better compete with the larger carriers that are further ahead in their 4G plans.
Impact On Competition
T-Mobile’s potential return to strength could be a concern for AT&T and Verizon, both of which have benefited from the proliferation of postpaid contracts and the lack of an iPhone on T-Mobile until now. While subsidies have impacted margins, they have also helped the bigger carriers use their greater negotiating power to offer a wider choice of smartphones at low initial prices, thereby locking in customers for the longer term. This has not only enabled them to gain market share at the expense of smaller carriers but also helped them avoid commoditization of their services. This is why the industry must be watching T-Mobile’s moves carefully for if T-Mobile’s value plans become popular, Verizon and AT&T might be forced to re-evaluate their postpaid strategies, and either drop their service plan prices or go the contract-less path.
This is however a big ‘IF’ since T-Mobile’s network coverage in rural areas is not as extensive as some of the larger carriers and its high-speed LTE network is only just getting out of the blocks. Existing iPhone 5 models are not fully compatible with all of T-Mobile’s high-speed networks. For example, the AT&T iPhone 5 model, if unlocked and used on T-Mobile’s network, will be able to access LTE in only a handful of cities and the slower 21Mbps HSPA+ network available in all of 49 cities across the U.S., and not the higher speed 42Mbps one. Outside of these cities, the handset will be limited to 2G EDGE speeds only. Compatibility with Verizon or Sprint handsets is even more limited – neither support T-Mobile’s LTE network but they can work on its limited HSPA+ network in 49 cities. So, the chances of T-Mobile poaching subscribers from rival carriers is limited for now.
Moreover, the option of buying unsubsidized phones has been around for quite some time now, but most still prefer going the subsidized route due to the low upfront investment. While T-Mobile’s plan is to eventually reduce the impact of handset subsidies with the no-contract plans, we expect the handset installment plans to be a lot more popular, implying that the upfront subsidy costs will continue to impact margins. This should give Verizon and AT&T pause in marketing unsubsidized contract-free plans more widely. Also, giving up contract plans will lead to higher churn and greater competition for the high-value lucrative postpaid customers, which the bigger carriers will not be willing to let go off that easily.
That said, T-Mobile’s new service plans provide an exciting alternative to customers who prefer contract-less plans. Since the iPhone 5 that Apple has been selling since April 12 is compatible with all of T-Mobile’s networks, the carrier might be able to hold on to some of its postpaid subscribers that would have been looking to jump ship. What will be interesting to see is if the no-contract plans will be able to attract customers from rival carriers in large enough numbers to force a rethink. This would, however, depend on the extent to which T-Mobile’s network modernization initiatives take hold, which might enable it to compete on a more even keel and eventually force the competition to give the no-contract plans a try. The launch of the next-generation iPhone later this year, by what time T-Mobile would be further along in its LTE plans, will be crucial for the future of the industry as a whole.