On T-Mobile killing the subsidy: It's about time

T-Mobile USA wants to shake up the status quo in the wireless industry to spur its turnaround. At the same time, it could change the way consumers think about how they pay for their services.

T-Mobile CEO John Legere yesterday said the carrier would eliminate subsidies next year, moving completely to its "Value" plans. In doing so, it will be the first nationwide carrier to shed the age-old (and typically more lucrative) practice of signing customers to long-term contracts in exchange for subsidies.

Under this model, consumers either pay full price for the smartphone, or pay in monthly installments until the device is paid off. Either way, it's a more transparent way to operate and doesn't allow the carrier to justify higher rates throughout the life of the contract.

The carrier, a unit of Deutsche Telekom, has already been seeing a shift towards the no-contract business as many of its so-called postpaid customers have fled the service, leaving for more expensive carriers that offer the iPhone, or less expensive regional or bargain prepaid service providers.

That T-Mobile is cutting out subsidies and pushing for more transparency isn't as huge a surprise as it initially appears; much of the wireless industry is investing in prepaid since there is more opportunity for growth here. T-Mobile itself lost nearly half a million contract subscribers in the third quarter, offset by a gain of 365,000 prepaid customers.

But by coupling its plans with a potential lineup of affordable flagship phones -- something Legere promised yesterday -- the carrier could help shift the mindset on what exactly consumers get for what they pay.

As an example, Legere said consumers would be able to get the "most iconic device in the world" -- a hint at the iPhone, which T-Mobile will begin to offer next year -- for $99 and a monthly installment of $15 to $20. Legere even pulled out an iPhone out of his jacket pocket to demonstrate, but it was unclear whether he meant the new iPhone 5, or the more affordable older models. It's likely that T-Mobile would also bring in other big-name devices such as Samsung Electronics' Galaxy S line.

The details of how all this will work with the iPhone are still unclear. Typically, a customer will sign up for a contract, but have the option to either pay full price for a phone or pay for the phone in monthly installments. It's better than blindly getting a subsidy and getting locked into a higher rate as is typical among carriers. Legere said that consumers would also be able to trade in their phone for fair value at any time if they wanted to upgrade to a new device.

In doing this, T-Mobile may be able to get past the dilemma that other prepaid carriers face: the inability to juggle the best smartphones at an affordable price with a low monthly plan.

The prepaid carriers are able to offer a lower monthly rate on voice, text message, and data services because they typically don't offer any kind of subsidy on their devices. The nationwide carriers do, but ask consumers to sign a two-year contract in exchange for that discount.

As a result, an iPhone 5 at Verizon Wireless or AT&T starts at $199, while Leap Wireless, known to consumers as Cricket Wireless, sells it at $499.

The prepaid carriers have long been unable to get access to the best smartphones right away, and will charge a high upfront price for those high-end devices they do get.

While the longer-term savings are potentially greater, consumers looking for the latest and greatest phones tend to shy away from the big one-time hit and stick with the national carriers instead. Most are happy to take the subsidy.

But if T-Mobile can actually offer the best smartphones at the lowest price and charge a low monthly fee, it could actually change the way people view prepaid services for the better. Better yet, Legere said this is one move T-Mobile's larger competitors couldn't -- or wouldn't -- match.

T-Mobile could use all the advantages it can get. While it has changed up its marketing message and gotten more aggressive in its attempt to nab customers from other carriers, it continues to struggle with growth and is well behind the others when it comes to its next-generation LTE network deployment.

The elimination of contracts next year is supposed to be the first step in a series of industry shakeups. If T-Mobile makes good on this promise, it should definitely be a fun year for the wireless world and for consumers.

Corrected at 6:13 a.m. PT: The story initially said, wrongly, that T-Mobile would eliminate contracts. The carrier plans to only eliminate subsidies for smartphones.