Is the end of the cell phone contract nigh? T-Mobile has taken a first step by announcing that it will no longer offer phones with subsidies, which coincides with the carrier finally offering iPhones for sale. Now, T-Mobile selling iPhones for $649 iPhones rather than $199 with a contract might sound particularly crazy, but it's actually a rather smart move.T-Mobile has struggled to compete with AT&T and Verizon, who've both come to dominate the market, partially due to their contract models. It's a straightforward concept: Bandwidth and infrastructure for cell networks is extremely expensive, so companies help defray that cost by offering consumers something really shiny, like an iPhone, for cheap in trade for locking down their cash for two years.T-Mobile's parent company, Deutsche Telekom, doesn't want to sink a bunch more money into the firm to try to compete, as evidenced by Deutsche Telekom's attempt to merge T-Mobile with AT&T, which was blocked by courts last year. The plan now is then to try to woo customers by ditching the front-end costs of cell phone subsidies, and passing on those savings to customers while arguing that AT&T and Verizon customers–who are consistently unhappy with their service, according to surveys and reviews–are getting hosed under the subsidy system. Matthew Yglesias at Slate sums up the argument in a great dissection of T-Mobile's gambit:[T]hat subsidy is quite costly for customers. If you buy a subsidized iPhone 5 from AT&T, the cheapest plan available costs $85 per month and only comes with 1 GB of data, a minimum of $2,040 over the two years of the contract. A basic T-Mobile unlimited voice plan with 2 GB of data costs $59.99 per month, $1,440 over the two years. In order to get that $450 iPhone discount, you would end up paying $600 more to AT&T over the life of the contract, and get less data.A plan with a subsidized phone is a bit like a house with a mortgage. Your upfront costs are lower, but total costs go up because you have to pay off the loan. The difference is that there are actually good reasons to finance houses with loans. One, the interest is tax deductible, which limits the total cost. Two, houses are incredibly expensive and saving up to buy one in cash could take decades, not months. And three, the underlying house is an extremely durable asset, so it makes sense for banks to extend credit on generous terms.Smartphones, by contrast, suffer from rapid depreciation because of technological obsolescence. Paying the full up-front cost, saving on a cheaper cellphone bill, and then assessing your desire to buy a new model down the road based on the actual merits of the upgrade rather than your wireless provider’s upgrade cycle makes much more sense.While AT&T and Verizon might make up money on the back-end by eventually charging customers more than their subsidy cost, T-Mobile is betting that it can put all the money it'd allocate to subsidies to use growing its network, and (hopefully) continuing to offer cheaper plans. And for T-Mobile, who cares if someone decides to buy a $200 phone rather than a full-price iPhone? They still save the subsidy, and their profit from selling phones likely pales in comparison to revenue generated from subscriptions.Ditching subsidies is a move we've already seen this year in Europe. In September, 242,000 cell phone connections were dropped in Spain, as millions in that country and elsewhere give up their cell phones altogether. At the time, that story was interesting because many of us can't imagine dropping our cell service, no matter how bad the economy gets. But now it sheds light on the T-Mobile move.Vodafone and Telefonica, the two European mobile giants, had previously used Spain as a test bed for killing smartphone subsidies. Vodafone announced in September that it was bringing the subsidies back, because large amounts of subscribers were jumping ship for cheaper providers. Killing subsidies sparked a price war that led to some carrier with cheaper options and no contracts gaining subscribers wary of committing to a large monthly expense.So while Vodafone and Telefonica (and AT&T and Verizon) would do well to make sure their massive customer bases are locked in, T-Mobile may be able to swoop in and steal customers who aren't convinced by discounted phones to sign up for a contract. If that's the case, it might add some needed volatility into our stagnant mobile market.@derektmead
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