Will Carriers Adopt T-Mobile’s No-Contract Format?

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T-Mobile’s move to end two-year contracts should not be viewed as much of a surprise because the firm has been open in its dislike of long-term contracts for the past year.

T-Mobile LogoHowever, this is not a case of if-you-build-it-they-will-come. T-Mobile has its work cut out for it to sell this concept to people who by now are condition to the two-year contract method.

The thing about T-Mobile’s move is that the price of data plans and contracts is where these carriers differentiate. The phones are the same price from carrier to carrier. For example, if you buy an iPhone 5 from T-Mobile and purchase the phone up front, that’s $580 for the phone and $60 a month for 24 months with a 2GB data plan. Total outlay: $2,020.

On Verizon, you put down $199 and pay about $100 a month for a 2GB data plan. Total cost over two years: $2,600. So it’s a $580 price difference, but it was the data plan where you got hosed, not necessarily the phone.

T-Mobile No Contract CommercialAnd T-Mobile’s network is not the best out there, notes Bill Menezes, principal research analyst for unified communications at Gartner. Despite all those commercials with their model riding around the U.S. on a motorcycle and rattling off cities, T-Mobile has the smallest network in the U.S. and the poorest coverage.

“For corporate customers, the issue they have with T-Mobile is coverage. That’s why it’s not a player in the enterprise. There will be a lot of consumers whose travels are well consigned. But other customers who need to think about will I have coverage traveling from one city to another,” he said.

So T-Mobile’s success will be based on a whole bunch of variables, the lack of a two-year lock-in being only one of them. It has to compete on coverage, data plans, service, support and a selection of handsets.

AT&T Logo“They needed to differentiate themselves from the pack. Going contractless is one way to do that,” said Jack Gold, president of J.Gold Associates, a mobile market research firm. “Other thing it does for them is that it provides them with a way of almost immediately reducing costs.”

Subsidies put a pretty big drain on carrier bottom line. Carriers spend $600 to acquire a phone, but then they get it back over two years. That’s the reason the margins have plunged at the major carriers. Now people have the option to pay for the whole phone up front, although how many who will do it is debatable. “I don’t know how many people will pay that off versus use the old layaway plan,” said Gold.

Indeed, even though T-Mobile has shown that over time, people pay less, that may not resonate with people. “The American consumer has been conditioned to think of the monthly payment. If people knew the full amount of interest they would never get a mortgage. So people ask for the monthly payment. The question is whether that will be meaningful to a customer, who only asks ‘what’s my monthly payment going to be’?” said Menezes.

Verizon Wireless LogoGold sees the other side of the coin. “The argument has been for some time that consumers would not go for a non-subscription plan because they have to put up so much up front. If you tell people I will save you $30 a month over 2 years, there’s a class of users who will say that’s a good deal,” he said.

So how will the carriers react? The analysts believe they are watching and waiting. “They can certainly afford to wait and see, especially AT&T and Verizon. They can look and see if this will help drive people to those service plans. Verizon and AT&T have talked about loving the notion of consumers accepting a non-subscription model. If T-Mobile proves it, then expect them to put a toe in the market,” said Menezes.

Gold agrees that the other three major carriers won’t react quickly. “They will see if it takes hold with consumers before they go out and offer an equivalent, and likely so,” he said. “It will be interesting to see what percentage of customers will go that route. But it will take a while. We need to look at this is six, nine, twelve months out. There’s still a lot of customers under contract.”

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