Joseph Palenchar On Dec 17 2012 - 1:00am

T-Mobile's Bold Strategies: Will They Work?

NEW YORK — T-Mobile’s plans to sell Apple products sometime next year will be good news for Apple, bad news for Android smartphone makers, and possibly good news for T-Mobile — if the Apple devices help reverse shrinking postpaid customer base that has declined every quarter since the third quarter of 2009, analysts said.

Another bold move planned next year by the beleaguered carrier will end costly handset subsidies on postpaid- service phones to reduce the costs of acquiring new subscribers, and that move could also be successful, analysts said.

Under T-Mobile’s plan, still under development, T-Mobile wants to drop handset subsidies and replace them with an installment plan that would let subscribers pay off handsets over time. Such a plan, however, would not only have to reduce T-Mobile’s costs of acquiring new subscribers but also offer an underlying service plan that won’t deter consumers from signing up, analysts explained.

Under T-Mobile’s no-subsidy plan, the carrier would make mandatory plans that are similar to its current optional Value plans. Those plans require two-year contracts and offer lower service prices if the consumer opts for an unsubsidized handset, makes an up-front down payment on the phone, and then pays off the phone’s unsubsidized cost at the rate of $20/month for 20 months.

T-Mobile claimed the Value plans save customers money compared with Classic plans in which handsets are subsidized. Said a spokesperson, “With regard to cost savings on T-Mobile’s Value Plans, because customers pay the full price of the device — down payment and monthly installment payments — and a lower rate for their monthly plan, it enables them to save money over the life of the plan/device.” Customers can save even more, the spokesperson added, if they bring their own device to the network with a T-Mobile Value plan.

For his part, Strategy Analytics analyst Philip Kendall said consumer’s total cost of a future combined service and installment plan might not have to be lower than current plans with handset subsidies, just “roughly the same,” so as not to deter subscribers. Such pricing would still give T-Mobile enough flexibility to save money if the carrier “can get customers to upgrade slightly slower under the new system or perhaps if they just do some accounting wizardry,” Kendall said.

“Let’s say I can get an iPhone on the new deal for $199 up front and then 20 monthly payments of $20, or I can just pay $599 up front,” Kendall explained. “I would view the $400 discount I get, to be paid back through the monthly payments, as a subsidy. I am sure there are some accounting tricks T-Mobile could do to minimize the expense there — maybe sell the $400 credit on to a finance house — but at a very basic level, it is potentially just the same old subsidy in a new repayment vehicle. T-Mobile’s costs will be impacted more by only paying out that $400 every 30 months, instead of every 24 months, than eliminating subsidies altogether.”

Referring to T-Mobile’s plans to offer Apple products, IDC research manager Ramon Llamas said the carrier “absolutely” needs the iPhone to rebuild its postpaid subscriber base, but network improvements are also needed. “A lot of people leave T-Mobile because T-Mobile doesn’t have the iPhone, but it’s also network speed and coverage,” he said.

On the network side, Llamas said, “T-Mobile has a lot of catching up to do,” though it does plan to improve network quality and, by the end of 2013, roll out 4G LTE to a footprint reaching 200 million consumers.

Analyst Neil Mawston with Strategy Analytics called TMobile’s plan to offer Apple devices with Apple’s cooperation “reasonably good news for Apple and bad news for Samsung and Android.”

Strategy Analytics’s Kendall noted that the iPhone would more likely attract more subscribers to T-Mobile than Value plans. Mandatory Value plans are “not necessarily going to make new customers flood to T-Mobile. The iPhone is more likely to benefit T-Mobile’s customer numbers than the [installment-plan] model.”

The equipment installment plan, nonetheless, “is a valid model that works well in some countries and, provided the underlying value plan is attractive enough to accommodate the [monthly installment payment] on top, then it should work for T-Mobile,” Kendall said.

“Separating the handset repayment from the service charges can definitely work — it just isn’t that good if the service charges remain the same and suddenly there is an extra $20 monthly charge for the handset,” he noted.

For his part, Ross Rubin of Reticle Research said T-Mobile would have to price its phones carefully to avoid sticker shock. “Consumers are increasingly valuing phones as retail products, and we see more price elasticity based on the device and less on the total cost of ownership over the course of a contract,” he said.