T-Mobile's New "Un-Carrier" Phone Plan: Game Changer or Dud?

Last month, T-Mobile introduced its new "un-carrier" plans, which -- along with the launch of Apple's (NASDAQ: AAPL  ) iPhone on the T-Mobile network -- are meant to grab market share back from larger rivals AT&T (NYSE: T  ) , Verizon (NYSE: VZ  ) , and Sprint (NYSE: S  ) . The essence of T-Mobile's idea is that it will not subsidize phone purchases, but plans will be cheaper and customers will not be locked into two-year contracts. While many customers are put off by cell phone contracts and the high cost of service, I am skeptical that T-Mobile's plan will take off. In fact, the strategy reminds me of another major company that recently tried (unsuccessfully) to "retrain" customers: J.C. Penney.

The big idea
Typically, the three big carriers subsidize customers' phone purchases with the signing of a two-year contract. AT&T, Verizon, and Sprint don't do this out of the goodness of their hearts. Their voice, text, and data plans are priced well above cost, and the two-year contract assures the carriers that they will earn enough profit to recoup the subsidy. T-Mobile's idea is to create a more straightforward and honest pricing scheme. Plans will be cheaper, and customers have the option to bring their own GSM phones, or to buy a phone from T-Mobile, which can be paid for up front or financed over two years.

For example, the iPhone 5 will be available beginning Friday for $579.99 up front (probably close to cost for T-Mobile), or for $99.99 down and $20/month for 24 months. This can be combined with an unlimited talk/text/4G data plan that costs $70 per month (2.5 GB of data costs $60 per month, and 500 MB costs $50 per month). The total cost of the unlimited plan, including phone payments, would be $90 per month, with $99.99 down.

For customers, a major advantage of T-Mobile's new plans is that there is no "use it or lose it" upgrade cycle. At the other three carriers, plans are more expensive (to cover the cost of big phone subsidies), which means that customers who do not take advantage of the option to upgrade every other year are overpaying. Customers who finance phones through T-Mobile will be able to upgrade after two years if they want to do so, but they can also save money by upgrading less frequently.

Apples-to-apples
Comparing T-Mobile's plans to those of other carriers is complicated by the fact that the four big carriers do not offer fully comparable services. Verizon does not even offer individual data plans any more: everything is a shared/shareable plan. The only true equivalent to T-Mobile's unlimited plan is Sprint's "Simply Everything" plan, which is $109.99 per month. That's significantly more than the $90 per month T-Mobile customers would pay when financing an iPhone. On the other hand, for people who can make do with 450 anytime minutes (for calls before 7 p.m. on weekdays), Sprint offers an unlimited text and data plan for $79.99 -- $10 less than the T-Mobile unlimited plan. AT&T individual plans are slightly pricier, and -- as noted earlier -- Verizon only offers shared plans now.

Comparisons get even more complicated when looking at family plans. For a family with three smartphone lines, Sprint's $179.98 price for three (subsidized) smartphones, unlimited text and data, and 1,500 anytime minutes seems hard to beat. Furthermore, AT&T and Verizon are fairly competitive on price with Sprint and T-Mobile for couples and families. AT&T and Verizon both offer plans for $200 or less per month with three smartphones, unlimited voice and text, and 6 GB of shared data. By contrast, T-Mobile's unlimited data share plan is $150 for three smartphones, and a plan that provides 2.5 GB per line is $120 per month. If each user is financing an iPhone for $20/month, the T-Mobile plan costs more than the comparable Sprint plan, and is only slightly cheaper than the AT&T and Verizon share plans.

Will it succeed?
T-Mobile is trying to attract customers through a clear value proposition, but the proliferation of different plans and features at different carriers will make it very hard for T-Mobile to gain traction. I think T-Mobile could have substantial appeal to certain people, particularly those who need unlimited voice and unlimited data and those who are happy to keep using older phones. However, for most users, the T-Mobile plans will be fairly comparable in price to their current plans from AT&T, Verizon, and Sprint. Furthermore, many Verizon and AT&T users are further locked into their current carriers through bundles that include TV, home phone, and/or Internet service. A large segment of the market is simply out of reach for T-Mobile.

In a lot of ways, T-Mobile's conundrum reminds me of the problems J.C. Penney has faced in the past year. J.C. Penney CEO Ron Johnson thought he could retrain customers to prefer a simpler price scheme that emphasized everyday value rather than marking items up in order to put them on sale. However, consumer psychology won out over what appeared to be common sense. T-Mobile's plans are in many cases cheaper than comparable plans from the major wireless carriers, and do not force contracts on customers. Nevertheless, the vast majority of mobile customers seem perfectly happy to pay hefty monthly bills in return for a "free" (or cheap) smartphone every other year. T-Mobile therefore faces an uphill battle to regain its relevance.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 09, 2013, at 10:24 PM, mdl00 wrote:

    I wish T-Mobile would offer the same subsidies as the other big three, alongside their financing option.

  • Report this Comment On April 09, 2013, at 10:33 PM, Jjkiam wrote:

    The new Tmobile plan introduces a more straight forward pricing model that will hopefully force more competition between the carriers. I look forward to getting out of my Verizon contract and finding a more attractive plan that meets my families growing data usage !

  • Report this Comment On April 09, 2013, at 10:56 PM, vergel wrote:

    I disagree that T-Mobile's plan will not succeed. The US is far behind in cellular phone offerings (phone and service) anyway. In the Philippines and other Asian countries, you can buy any phone from any manufacturer and get a pre-paid or contract plan with any provider (SIM chips are as cheap as 40 cents). One is not beholden to providers like here in the US. I like this new way of doing business that T-Mobile is introducing to the US.

  • Report this Comment On April 09, 2013, at 11:19 PM, DrPoon wrote:

    Of course T-Mobile will succeed with this. They will succeed wildly. It comes down to the numbers. Even without the subsidy you pay less per month than you do with other carriers, even as you are paying 20$ a month for the phone. AT&T rips people off charging 20$ just for messaging for chrissakes.

    It's such a better value it's not even comparable and they will get a significant chunk of folks who are not already locked in a contract with another carrier.

  • Report this Comment On April 09, 2013, at 11:56 PM, Arsenm277 wrote:

    One thing they forgot to mention is that tmobile $70 is $70 dollars no additional taxes and hidden fees, from experience, Sprint has the highest hidden fees and always try to overcharge you. And T-mobiles Internet is a lot faster then sprints. Way to go tmobile, I will be coming soon with the new s4 after I throw my IPOOP in the toilet

  • Report this Comment On April 10, 2013, at 12:39 AM, Roamer00 wrote:

    Similar article appeared in yahoo news about two weeks ago, then I posted to their comments section that this was no different then what they had, you still have an higher than normal monthly bill for a two year period, I could be wrong, but that's the same as their contract period under their old system, call it what it is, a lie with a different color.

    That does explain why their color is pink, blushing from such a lie would make one look pink.

    Now yes you can purchase the phone outright, but still the monthly plans they have are no different from their original pricing models under their old plans, so where is the change? Oops, pink again I see.

  • Report this Comment On April 10, 2013, at 12:43 AM, hankspank wrote:

    These comments are contrived shill comments by tmobile execs. How pathetic.

  • Report this Comment On April 10, 2013, at 1:16 AM, DrPoon wrote:

    Yes my name is Dr Poon and I am a shill exec for T-Mobile. Give me a break.

    I've been waiting for years to finally give the finger to AT&T, but there have been no other viable options. I hate contracts and i hate all the hidden fees. T-Mobie is offering exactly what I want as far as a phone and a plan goes. We will see how the service is, but at least where I live AT&T never seems to work in the places that I actually would like to use it. At least I know that T-Mobile want me, an iPhone user, as a customer. ATT acts like they could give a crap.

  • Report this Comment On April 10, 2013, at 1:25 AM, DrPoon wrote:

    Just so you know I am an original AT&T iPhone user that signed an original 'unlimited' contract when the 3GS.

    I bought an unlocked 4 and never signed another contract.

    The thing with ATT is those a*holes didn't even keep their end of the bargain. They capped me (throttled... wink...wink...) at 3gb a month even though I had an 'unlimited' contract.

    AT&T can die and go to hell for all I care and I hope they fail in the worst possible way

  • Report this Comment On April 10, 2013, at 3:09 AM, cloudle77 wrote:

    Journalist these days need to do some research before they speak. Your lack of fact is what makes this article worthless. Here are the prices directly from VZW, At&t, Sprint and T-Mobile website. For future article make sure you do some research before you write garbage.

    Verizon:

    Iphone 5: 5 x 200 = $1000

    Unlimited everything with 12gb: 270 x 24 months = $6480

    Total cost including the phone after two years is : $7480

    ---------------------------------------------------------------

    At&t

    Iphone 5: 5 x 200 = $1000

    Unlimited everything with 3gb data per line: 449 x 24 = $10,776

    Total cost including the phone after two years is : $11,776

    ---------------------------------------------------------------

    Sprint

    Iphone 5: 5 x 200 = $ 1000

    Unlimited everything with unlimited data per line: 449 x 24 = $12,216

    Total cost including the phone after two years is : $13,216

    ---------------------------------------------------------------

    T-mobile

    Iphone 5: 5x580 = $2900

    Unlimited data up to 2.5g per lines with no data overage cap: 150 x 24 =$3600

    Total cost including the phone after two years: $6500

    Now to be fair to sprint I will include the cost of T-Mobile truly unlimited data plan: $210 x 24 = $5,040

    Total cost including the phone after two years is : $7,940

    Numbers don’t lie. Just terrible journalist!

  • Report this Comment On April 10, 2013, at 3:28 AM, mrshepard wrote:

    Cloudie, your Sprint prices are wrong.

    iPhone 5: 5 x $200 = $1000

    FAMILY PLAN with 1500 shared minutes (to landlines), Unlimited data and Texting = $240/mo x 24 months = $5,760

    Total cost of phones and plan over 2 years: $6,760

    STILL less than T-Mobile.

    Now, if you were pricing it based on 5 INDIVIDUAL plans, then yes, it would be a lot more, since it would be 80/month for each.

    Maybe you should do YOUR research too.

  • Report this Comment On April 10, 2013, at 3:39 AM, tfaz wrote:

    I have Sprint. I signed up almost 10 years ago for the unlimited plan. I pay 120 (including taxes) for 2 phones. That is truly unlimited - minutes, data and text - no limit.

    If I were to pay full price for 2 iphone 5s, I would still be paying only $3,400 for 24 months.

    Seems like I got a plan that is no longer available so I will keep it.

  • Report this Comment On April 10, 2013, at 8:58 AM, SeanSmyth wrote:

    I have been a t-mobile customer for several years. I changed to the new plan.

    What they don't tell you is that the second phone is $30/month, and all other phones are $10/month.

    My family plan has 5 phones. I pay $125/month for all 5. That includes all taxes and fees.

    Also, family members were not upgrading every two years (why throw away a perfectly good phone just because it is 2 years old - no wonder we have a trash problem in this country).

    Finally, t-mobile's price for an iphone 5 is $579. To buy an iphone 5 without a plan is $649. So you are still saving money on buying the phone

    And if you do the $100 down, and $20/month for 24 months. That comes out to $580. You will only pay $1 in finance charges.

  • Report this Comment On April 10, 2013, at 11:21 AM, TMFGemHunter wrote:

    Tfaz makes another good point that I should have mentioned in the article. A lot of people have "legacy" plans that are cheaper than what their carriers are offering today. This is another base of users who are essentially "locked in" to their current carriers.

    I'm personally very intrigued by the T-Mobile plans, and would certainly consider T-Mobile. However, I still think T-Mobile will struggle to win over many customers from the big three.

    Adam

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