The American cell phone industry functions differently from that of the rest of the world. The system in the rest of the world is very simple, you buy a phone at retail price and bring it to whatever carrier you want to use. In the United States most consumers buy a phone from a carrier with a significant subsidy. An iPhone or high-end Android phone usually costs ~$200 with a two-year contract. Full retail price of these devices is usually $600+. In exchange for $400 or more off the price of the phone the consumer pays a more expensive monthly rate over the course of the two-year contract. There is also the limitation that the consumer can only use that phone on that network, unlocking it from that network before the contract expires is now a criminal offense.
In the short term this is nice for consumers because they get a cheap phone. However, in the long term this costs significantly more. The service plan is so much more expensive that it more than outweighs the initial savings on the phone. It is also highly restrictive to users, many of whom now wish to upgrade their phones more often than once every two years as the technology marches forward.
I believe a move to a no subsidy and no contract structure is inevitable. Consumers will demand greater freedom to use their devices how they please. They will also realize the cost difference and be driven towards the cheaper prepaid plans as they look at their $100+ monthly bills.
So which carrier is best positioned for this inevitable change in the U.S. market?
T-Mobile (NYSE:TMUS) is the first major carrier to promote these prepaid plans. Its plans include unlimited talk and text with data packages varying from 500mb to unlimited with prices ranging from $50 to $70 per month with no contact.
Verizon (NYSE:VZ), the current cell market leader, is recognizing this shift. It is offering prepaid plans with unlimited talk and text that cost $60 per month for 500mb and $70 per month for 2gb of data. There is no unlimited data option. The other big concern with the Verizon prepaid plans is they do not access the 4g LTE network. It is stuck on the old slow 3g.
So at the moment T-Mobile offers the best choice of prepaid plans but not the best coverage or the biggest marketing budget. If all the major carriers switch to no subsidy plans, phone selection will no longer be a major differentiator between the carriers as any customer can bring any phone to any carrier. This leaves only price and coverage quality to differentiate the networks. Ultimately this is Verizon`s game to win or lose. Verizon needs to make its prepaid plans the standard offering, give them 4G LTE capabilities and bring their prices down in line with competitors. If it does this it will dominate the world beyond subsidies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.