T-Mobile faces war of words after killing subsidies, contracts

There's a lot of confusion over whether T-Mobile's new plans are a good thing. CNET breaks it down for you.

T-Mobile CEO John Legere at today's press conference. Lori Grunin/CNET

T-Mobile's seismic shift in how it sells phones and service may be too much for some consumers to process.

In moving away from the old -- and arguably more comfortable -- business model of subsidized phones and two-year contracts, T-Mobile is hoping to shake up the industry and grab a bit of the limelight in the process.

But oftentimes, different is scary. T-Mobile faces the daunting challenge of explaining to consumers how its newly unveiled no-contract plans offer a benefit over the old model, and why it's actually beneficial for them to pay the full price for a smartphone rather than take the subsidy.

"What we're attempting to do is to start a dialogue that is best had with as much visibility, transparency, and modularity as possible," CEO John Legere said in an interview today.

Years of carriers offering up subsidized smartphones have conditioned consumers to believe that the highest-end devices cost only $200 to $300. In actuality, the iPhone 5 costs $650 without a contract at most major carriers. Consumers pay the difference -- and then some -- throughout the life of that two-year term.

T-Mobile is attempting to bring some visibility in the process by separating the phone and service costs into two different fees. Yes, consumers have to pay the entire price of the phone through an upfront fee and monthly installments. But the fees are more distinctly laid out relative to the bundled fee from a rival carrier, and are ultimately lower.

"While the operator is rightly stressing the simplicity and freedom of its new approach, it will also have to educate postpaid customers on the need to pay for devices as well as services," said Mike Roberts, an analyst at Informa Telecoms & Media.

For many, the monthly installments constitute another contract, just one that's worded in a different way. If a customer leaves T-Mobile before the 24 months, that person needs to pay off the difference for the phone, which essentially acts like an early termination fee.

Current Analysis analyst Lynnette Luna tweeted: "While T-Mobile is eliminating device subsidies and contracts, the device financing element still serves as a contract."

Roger Entner, an analyst at Recon Analytics, called it "putting new paint on an old business model."

But there's another way to think of T-Mobile's new model. It's very similar to zero-percent financing offered by car companies: the company floats you the phone for a small upfront fee, and you pay the balance off in interest-free installments. It's a better option than spending $600 on a credit card and paying 18 percent interest.

Of course, consumers aren't paying $600 under a subsidized model. In fact, at no time does the consumer ever pay more than that initial price for the subsidized smartphone. While the difference is made up through higher rate plans, at no time does the consumer ever feel the pinch of paying for the phone itself.

Verizon Wireless -- Two-year contract
Samsung Galaxy S3 cost (16GB) $199.99
Activation fee (one-time) $35
Monthly access rate $40
Monthly rate (4GB data) $70
Access fee, 24 months $960
Data fee, 24 months $1,680
Two-year total, excluding taxes $2,875

T-Mobile -- No-contract carrier
Samsung Galaxy S3 cost (16GB) $589.99*
Activation fee $0
Monthly rate (Unlimited 4G LTE) $70
Data fee, 24 months $1,680
Two-year total, excluding taxes $2,270
*Up-front cost equals $109.99 down payment, plus $20 per month for 24 months.

By breaking the cost of the phone out, T-Mobile is attempting to shine a spotlight on what it considers hidden fees designed to take money out of the consumer wallet.

"This age-old subsidization question is going to take some time," Legere said. "It's a big conversation to have."

Legere said he wants to get rid of old industry terms such as prepaid and postpaid, which are the descriptors for no-contract and contract, respectively. He said he doesn't believe T-Mobile's move to eliminate contracts makes it a prepaid carrier since customers pay at the end of the month like usual. (There is an actual prepaid option where consumers who don't go through a credit check pay at the beginning of the month.)

It's part of T-Mobile's broader mission to dispel what it believes are myths and misconceptions about the industry. Legere said that consumers still irked about the new plans should do the math.

"Before you complain, compare it to the alternative," he said. "It's a beautiful conversation."

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