Did T-Mobile really do away with contracts?
If consumers are to believe all the hype surrounding T-Mobile’s UNcarrier movement, mobile contacts are dead. The nation’s fourth largest carrier has been carrying on an assault against customer pain points in the mobile industry, completely doing away with contracts for its own subscribers and, in T-Mobile’s latest move UNcarrier move, which it unveiled at CES 2014, offering to buy out the contracts of subscribers from other carriers. When John Legere explained how T-Mobile would go about doing this, he sold it as basically the nail in the coffin of carrier contracts everywhere – technically, no one is bound by mobile contracts anymore, as long as one switched to T-Mobile or is already a T-Mobile customer.
But did T-Mobile really do away with contracts for good?
T-Mobile’s current model involves transparently separating device costs and service costs. Customers now choose a monthly plan with unlimited talk and text, and high speed data buckets that range from 500MB to unlimited. So T-Mobile service plans are now much simpler for consumers to pick and to understand, so that’s a good thing. But what might be confusing for some customers is that their monthly bill might be higher or lower, depending on the device they pick.
That’s because T-Mobile doesn’t subsidize phones anymore. Customers pick a device, usually pay little or nothing up front, and spread out their phone payments over two years.
This is nothing new – T-Mobile has been offering no-subsidy plans for several years now, and it’s been a year since all of its plans were like this. And when customers sit down to do the math, they still generally find out that T-Mobile’s 2-year price for the phone and service is still cheaper than Verizon or AT&T, even though T-Mobile phone prices might seem higher at first.
But if customers choose to leave T-Mobile before their phones are paid off, they’re still on the hook for whatever they still owe, and because of this, some people are starting to claim that T-Mobile’s model really isn’t any different than AT&T, Verizon, or Sprint. Consider this: the chart below shows how much a customer would owe T-Mobile, AT&T, Verizon, and Sprint, if he or she bought the Samsung Galaxy Note III and then left after a certain number of months.
At first glance, it looks like customers who choose to leave their carrier before two years are actually better off with AT&T for the first 15 months, and wouldn’t benefit at T-Mobile until the last several months of the two-year term.
However, this chart doesn’t take the full device cost into account – it assumes $0 down on T-Mobile, but it doesn’t include the up-front cost that customers will have to pay on AT&T ($299.99), Verizon ($199.99), and Sprint ($349.99). Let’s adjust our numbers to include the total amount that a customer paid up front for the device, plus early termination fees (if applicable), and then take another look:
Things now look a little different. Once you consider the up-front device cost on all four carriers, T-Mobile is the better choice most of the time, sometimes by hundreds of dollars. In all cases, after half a year, T-Mobile is the better option. Remember, this second chart includes the total amount a consumer is paying up front for the device, plus early termination fees if applicable, if he or she leaves his or her carrier before two years are complete.
What I like about T-Mobile’s moves
First, T-Mobile is being more transparent about how much devices cost. Consumers know precisely how much of their bill each month is going toward their phones, and how much is going toward their service. With the other three carriers, if consumers choose a traditional contract plan and a subsidized phone, it’s not clear at all.
Second, T-Mobile customers who pay off their phones (or who bring their own devices) will pay a lower amount each month. The other carriers have introduced similar plans in recent months, but by and large they are still pushing contracts and subsidies.
Finally, when you crunch the numbers – including monthly service costs on all four carriers – T-Mobile usually comes out ahead of the others. In terms of true value for consumers, T-Mobile is king in the postpaid realm.
What you still need to remember
Even though T-Mobile claims that it did away with contracts, if you finance a phone through T-Mobile and leave before it’s paid off, the balance owed is due immediately. In essence, that’s the same as an early termination fee, so some might argue that T-Mobile’s marketing is a little misleading.
At the same time, all things taken into account, the amount you’ll owe T-Mobile – and the amount you’ll pay all together – will probably be much less than the other carriers, so you will still come out ahead in most cases.
What T-Mobile has done is move from a service-based contract to a device-based contract. There is still technically a contract present, since customers must agree to pay off their phones immediately if they leave T-Mobile. But the way T-Mobile is doing things is more transparent, more honest, and offers more value. It’s a better deal, so I’m not too upset about the way that T-Mobile is marketing this.
You just need to be completely aware of what you’re signing up for.