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.
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.
Fool contributor Adam Levine-Weinberg owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
More from The Motley Fool
3 Dividend Stocks Perfect for Retirees
Microsoft, Home Depot, and AT&T are dividend-paying stocks that could help make your retirement dreams a reality.
2018: The Year of Lightning-Fast 5G?
For smartphone users, 5G is a massive step forward; 13 cities will have access this year.
Retired? 2 Stocks You Should Consider Buying
These companies deliver both solid fundamental growth and generous dividends.