T-Mobile's Contract-Free Plans Could Spur A Shift In The Wireless Industry

Includes: DTEGF, T, VZ
by: Trefis

With the U.S. wireless market getting highly saturated and the larger carriers, Verizon (NYSE:VZ) and AT&T (NYSE:T), cornering a bulk of the subscribers, Deutsche Telekom-owned (OTCQX:DTEGF) T-Mobile is looking for innovative ways to disrupt the duopoly and gain market share. The fourth largest wireless carrier in the country recently launched new data plans, which are not only cheaper than competing plans but also contract-free.

In addition, the carrier confirmed that the iPhone will debut on its network in May and be made available with the new no-contract data plans upon launch. Subscribers purchasing the iPhone will have the option of either buying it outright or paying a low upfront cost and the rest in twenty-four easy monthly installments. The arrival of the iPhone on T-Mobile as well as its renewed bid to compete more effectively with radically new contract-free plans could have some serious implications on the wireless industry dynamics in the coming years.

Contract-free Plans Are Cost-effective For Subscribers

T-Mobile’s new data plans seem like a very good value proposition for subscribers who do not want to lock themselves to a carrier’s network for two years. Not only are the plans cheaper (from a two-year perspective as well) but also much more flexible than traditional postpaid plans in the sense that subscribers can switch carriers without having to pay a penalty and are only liable to pay the handset installments for the rest of the period. In this sense, the carrier is also being a lot more transparent with the pricing structure, by locking subscribers only to the subsidized handset and not to its service.

But therein lies a big risk to the carrier. Subscribers make carrier choices not just on the basis of service costs but also network coverage and data speeds; so the onus is on T-Mobile to aggressively invest in its network and retain the subscribers it attracts with its new plans. The arrival of the iPhone on T-Mobile also plugs a big hole in its handset armory, and should help it stem the loss of subscribers it has been experiencing due to the lack of the popular phone.

These moves are part of a broader bid on T-Mobile’s part to regain focus and position itself as an attractive cheaper alternative to the larger carriers after its buyout attempt by AT&T failed to pass regulatory approval in late-2011. T-Mobile has also made plans to acquire MetroPCS and is building out a LTE network in order to better compete with the larger carriers that are further ahead in their 4G plans.

Impact On Competition

T-Mobile’s potential return to strength could be a concern for AT&T and Verizon, both of which have benefited from the proliferation of postpaid contracts and the lack of an iPhone on T-Mobile until now. If T-Mobile’s value plans become popular, it could force Verizon and AT&T to re-evaluate their postpaid strategy, and either drop their service plan prices or go the contract-less path.

This is however a big ‘IF’ considering that T-Mobile’s network coverage in rural areas is not as extensive as some of the larger carriers, and that its high-speed LTE network is only just getting off the blocks. Existing iPhone 5 models are not fully compatible with all of T-Mobile’s high-speed networks. For example, the AT&T iPhone 5 model, if unlocked and used on T-Mobile’s network, will be able to access LTE in only a handful of cities and the slower 21Mbps HSPA+ network available in all of 49 cities across the U.S., and not the higher speed 42Mbps one. Outside of these cities, the handset will be limited to 2G EDGE speeds only. Compatibility with Verizon or Sprint handsets is even more limited – neither support T-Mobile’s LTE network, but they can work on its limited HSPA+ network in 49 cities.

Moreover, the option of buying unsubsidized phones has been around for quite some time now, but most still prefer going the subsidized route due to the low upfront investment. While T-Mobile’s plan is to eventually reduce the impact of handset subsidies with the no-contract plans, we expect the handset installment plans to be a lot more popular, implying that the upfront subsidy costs will continue to impact margins. This should give Verizon and AT&T pause in marketing unsubsidized contract-free plans more widely. Also, giving up contract plans will lead to higher churn and greater competition for the high-value lucrative postpaid customers, which the bigger carriers will not be willing to let go off that easily.

That said, T-Mobile’s new service plans provide an exciting alternative to customers who prefer contract-less plans. Starting April 12, Apple will sell iPhone models that are fully compatible with T-mobile’s high-speed networks. Despite the current shortcomings in network coverage, it will be interesting to see how T-Mobile’s new service plans are adopted by customers, for it could cause a shift in the wireless industry towards low-priced contract-free plans and increase competition in the coming years. This would, however, depend on the extent to which T-Mobile’s network modernization initiatives take hold, enabling it to compete on a more even keel and eventually forcing the competition to give the no-contract plans a try. The launch of the next-generation iPhone later this year, by which time T-Mobile would be further along in its LTE plans, will be crucial for the future of the industry as a whole.

Disclosure: No positions.