T-Mobile’s New Plan: Goodbye Subsidies, Hello Installments

On Thursday, T-Mobile announced that it will sell Apple "products" in 2013, but that's only part of the carrier's plans.

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Kacper Pempel / Reuters

On Thursday, T-Mobile announced that it will sell Apple “products” in 2013, but that’s only part of the carrier’s plans.

T-Mobile will also eliminate smartphone subsidies, in which customers pay a lower price for the phone in exchange for a two-year contract. T-Mobile will instead sell phones at full price, but with cheaper monthly service. Customers can also pay extra in monthly installments to reduce the up-front cost.

Confused? You might be, if you’re used to paying, say, $200 for an iPhone on AT&T, along with $70 per month or more for service. T-Mobile’s approach may be seem more complicated, but it saves money over the other major carriers in the long run.

As an example, let’s do the math on the Galaxy Note II, for which T-Mobile already offers an option to pay in installments:

  • The full price of the phone, without a contract, is $650.
  • Under T-Mobile’s Value Plan, you can pay full price for the phone plus $45 per month for basic service, which includes 500 voice minutes, 2 GB of data and pay-per-text. The total cost of ownership over two years is $1,730.
  • If you pay in installments, the up-front price is $250, plus another $20 for 20 months. On top of that, the cost of service is still $45 per month, bringing the total cost of ownership over two years to $1,730.
  • AT&T, by comparison, subsidizes the Galaxy Note II for $300 with a two-year contract. The cost of service, at minimum, is $70 for 450 voice minutes, 3 GB of data and pay-per text. The total cost of ownership over two years is $1,980.
  • In short, the total savings over two-years with T-Mobile is $250.

It’s also worth noting that T-Mobile now offers unlimited data for $10 per month more than the 2 GB plans listed above. And because the cost of monthly service is cheaper, the longer you keep your phone, the more money you save.

I’m glad T-Mobile is doing something different, while pushing unlimited data and cheaper plans overall. The company is making the right call by getting rid of its Classic Plans, which are more expensive both up-front and in the long run, and at the moment only add confusion to T-Mobile’s offerings.

But there are still challenges ahead. Once a company starts talking higher up-front prices, payment plans, and total costs in the thousands of dollars, it risks scaring people away. Other carriers gloss over those details and focus on the low sticker price for a reason. Besides, everyone’s needs are different, so it’s hard to compare one carrier’s costs of ownership with another in a general way. T-Mobile needs to get its message across–that it can save you money over time–without getting buried in nitty-gritty.

I hope it works out for T-Mobile, which has grown feistier ever since the U.S. government ruined AT&T’s plans to buy the carrier. In fact, T-Mobile seems eager to forget that chapter in its history. The gist of its plannedĀ marketing campaign around the arrival of Apple products? “You love your iPhone, but you hate AT&T.”