How T-Mobile's new service plans could change the industry

T-Mobile's no-contracts, no-subsidy plans could lead to more device interoperability and lower prices on handsets across the industry.

T-Mobile CEO John Legere talks up the company's new no-contract, no-device-subsidy service plans at an event in New York City. CNET Lori Grunin

Imagine a world where you could take your mobile phone to any carrier you wanted.

You wouldn't be bound to a contract, and your phone would be free from technical constraints that make it impossible to use on other carriers' networks. And forget about that $700 price tag that left you wondering if you were buying a phone or a computer. In this new world order, pricing on smartphones would fall as quickly as the components inside them become commoditized, much like the prices of all consumer electronics. That means no need to cling to a service contract in exchange for a hefty device subsidy.

Sounds pretty enticing, right? Well, T-Mobile's new pricing strategy could help chart a path in this direction.

Before I get too far ahead of myself, let me be clear: This is going to be a slow process. T-Mobile's new service plans -- which don't require a contract and require that customers pay for their devices either up front or over two years -- won't get us to this wireless market nirvana I just described. There are still technical challenges to be worked out to make device unlocking and true handset interoperability a reality. And on the business side, education is still needed for consumers to see the benefit of the no-contract, no-device-subsidy model.

But T-Mobile's plan provides a glimpse of what the future could be if the company is successful.

"We are closer than we have ever been before to a market where you can take your device to any carrier," said Anand Shimpi, editor in chief and CEO of AnandTech.com, a Web site for technology enthusiasts. "But there are still a lot of hurdles. The wireless market didn't get the way it is today because this is what's good for consumers. It's because the market is dominated by powerful forces."

Yes, those powerful forces. AT&T and Verizon Wireless control 70 percent of the market for a reason: Consumers like their services. They may not like the high monthly prices they pay, the caps on their data services, and the stiff contracts that bind them to these services. But what they do like is the reliable, fast, and ubiquitous networks offered by these service providers. Also, let's not forget that these operators are able to offer the most popular devices, such as the iPhone 5 and Samsung Galaxy S4, at a subsidized price.

But Shimpi thinks technical advancements and aggressive moves by companies like T-Mobile could shake up the status quo.

"What would the PC industry look like if all computers cost $2,000 and you could only use the devices that worked on your cable provider's network?" Shimpi added. "The long term view of wireless is that it's going to look more like the PC and broadband market. We will have competition in hardware and mobile operators. But in the meantime, these mobile operators will be doing everything they can to hold onto their power."

T-Mobile sets the stage with its network

Long before T-Mobile introduced its new no-contract, no-subsidy service plans, the company was embarking on a major network upgrade that ultimately will align the technologies and radio frequencies it uses with bigger competitors, namely AT&T.

When it comes to device interoperability and interchangeability two things need to be in harmony: carriers need to be using the same network technology, and those technologies need to operate at the same radio frequency. T-Mobile and AT&T always have been aligned on their basic network technologies, but they didn't use the same radio frequencies to deliver these services.

T-Mobile shows off its 4G LTE network at an event in New York City.

Because T-Mobile was spectrum-constrained when it first built its network, it was unable to deploy its faster 3G services in the same spectrum bands as AT&T. As a result, devices built for AT&T's network would not run at the faster 3G speeds when used on T-Mobile's network. This is why up until recently an unlocked iPhone from AT&T on T-Mobile's network operated only at 2G and 2.5G speeds, despite being able to access AT&T's faster 3G services.

For the past year, T-Mobile has been "refarming," or reusing, spectrum for its 3G and HSPA+ services to make room for new LTE services. While this move has allowed T-Mobile to more efficiently use its spectrum, it also finally has put its 3G and 4G services in the same spectrum bands as AT&T.

Mark McDiarmid, vice president of radio engineering technology at T-Mobile, said the company already has made significant progress in its spectrum realignment initiative. About 142 million potential customers can access T-Mobile's faster speed HSPA+ 3G/4G service in the same spectrum band that AT&T is using for that service. The company will cover about 200 million people with that service by the end of the year.

Even though it's still early days for T-Mobile's 4G LTE network, the company announced last week that it has launched 4G LTE service in seven cities using one of the spectrum bands that AT&T is using. That service is expected to cover 100 million potential customers by the middle of this year and 200 million by the end of the year.

The result is that a growing number of T-Mobile customers who come to the network with an unlocked AT&T phone will be able to connect at data rates that are as fast or sometimes even faster than those they would connect at on AT&T's network.

"We are aligning our two spectrum bands to be maximally compatible with all carriers in the Americas, and that includes AT&T," McDiarmid said. "We are doing this mainly because it is more cost effective to buy devices that are part of the biggest ecosystem. But it also has the benefit of making the devices interoperable."

Of course, T-Mobile's shifts in spectrum won't make all devices interoperable across all U.S. carriers. There are still old technology barriers that stand in the way. For instance,Verizon and Sprint use a fundamentally different network technology that is not compatible with AT&T and T-Mobile devices.

But there is hope for the future. Verizon and Sprint are deploying LTE for their next-generation 4G networks too. When these networks are fully rolled out and these carriers can retire their older technologies, there is a chance that devices across all four major carriers could interoperate.

To help solve the issue of carriers using different spectrum bands, chipmakers, such as Qualcomm, are putting more radios on a single chip, reducing the cost and space constraints associated with handling multiple radios.

"This is a big problem that everyone wants to solve," Shimpi said. "And the solution is likely to be a combination of things, including what chipmakers are doing with flexible transceivers."

The business strategy: Becoming the 'Uncarrier'

T-Mobile's network migration is only part of the story. The company's announcement last week that it's getting rid of contracts and device subsidies is another step toward greater choice and, ultimately, lower prices for consumers.

The knee-jerk reaction to this news is to immediately bemoan the fact that consumers are now expected to pay full price for devices. That's unfortunate. Even though most consumers may only pay $200 up front for a high-end smartphone with a two-year service contract (plus the $35 upgrade fee), they still pay full price for that phone through the monthly service fee. The only difference is that under such carrier contracts, consumers have no idea how much of their monthly bill is being used to subsidize the cost of that phone or when that phone is ultimately paid off.

"We have to remind people that there is no free lunch," said Harry Thomas, marketing director for T-Mobile. "People need to see how much they really pay each month for that phone under the subsidy model. And the truth is that our plan allows them to pay less for their devices and less each month for their service."

The LG Nexus 4 is sold unlocked and without a contract on the Google Play Marketplace for $350. Josh Long/CNET

The problem with the wireless market in the U.S. under the subsidy model is that people have no incentive to shop around for a lower cost device. Regardless of whether they get a cheaper device, they still pay the same monthly service fee.

That changes under T-Mobile's model. Not only do consumers see the true cost of the device, they also buy a less expensive device or even use an older device for which they didn't have to pay. The total cost of ownership, when you consider the device cost and monthly service, is less.

If consumers start looking at the true cost of the device and there is an incentive to buy a less expensive piece of equipment, this will pressure device manufacturers to compete on price -- something they haven't had to do in the smartphone market.

Google already has started to buck this trend. Last year, the company introduced its flagship smartphone, the Nexus 4, which sells through Google Play for as little as $300. That's about $100 more than most smartphones with a two-year contract, but it's more than half the cost of a smartphone at full retail price. Google is expected to unveil its newest Nexus smartphone next month at the Google I/O developer conference in San Francisco, and there's a good chance the company will once again offer a smartphone at a competitive price.

"There is no question that device makers are charging too much for their smartphones," Shimpi said. "The actual cost is probably somewhere around $200 or $300 per device. But it's nowhere near $700."

Follow the laggard? Will other wireless carriers follow T-Mobile?

Of course, the big question is whether other carriers will follow T-Mobile's lead. AT&T and Verizon benefit from locking customers into two-year contracts.

So why change? T-Mobile has adopted this strategy out of desperation. It has been losing customers each quarter. And it nearly went out of business awaiting the failed merger with AT&T in 2011. The breakup fee from that failed merger, worth about $4 billion , is helping drive the company's latest plan. T-Mobile not only got cash from AT&T but also some of its valuable Advanced Wireless Services spectrum, which it's using to build its 4G LTE network.

T-Mobile also has the weakest spectrum position out of all four of the major wireless carriers. The company's recent acquisition of MetroPCS will do nothing to help it expand its coverage in suburban and rural areas, but that acquisition should help T-Mobile increase capacity in metro markets where it already operates.

T-Mobile is targeting an important segment of the market. For the past couple of years, the prepaid wireless market has been growing, while growth in the traditional postpaid contract segment has slowed. In fact, last year was the first year in which wireless operators in aggregate saw postpaid contract plans decline, while prepaid plans increased. Now prepaid wireless service makes up about 25 percent of the market. But the prepaid market has been stifled by a lack of access to new devices. Many of these services, which lease capacity from larger carriers, also don't offer the fastest 4G speeds.

T-Mobile's offering will help solve both of these problems, giving consumers access to its fastest networks as well as new devices. And because T-Mobile is offering the ability for consumers to finance their handsets at 0 percent financing, the company is providing yet another incentive. As I said in my Ask Maggie column, the T-Mobile plan is a great deal for customers who live and work in T-Mobile's service area. Now it's up to T-Mobile to help consumers understand the benefits.

Said Shimpi: "The best way to create change in the wireless market and to force other carriers to be more open: Buy a Nexus 4 and join T-Mobile's service."

 

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