Mr. Legere and T-Mobile have been very effective at delivering the “un-carrier” branding with a new rate structure and Equipment Installment Payments for devices, effectively separating the equipment from rate plan so to speak.
WHAT IS THE STORY WITH SUBSIDIES?
It is a common belief that in the US, rate plans are structured with equipment subsidy recovery dollars incorporated into them. The common number thrown around is $20 per month per plan. However, you will not find definitive data anywhere that points directly at a set dollar amount of monthly recurring revenue that is set-aside solely for equipment subsidies. It is really just a fancy word for higher overall overhead and margins in their respective rate plans. There is more than the equipment subsidy involved in the cost of acquiring or retaining a customer. Yes, the model allows the carrier to recoup the expense of buying the equipment and selling it at a loss on contract (subsidy), but it also covers fixed overhead costs (lights, cell towers, power, people) and hopefully make a profit which we can all agree gets reinvested heavily into the carrier’s infrastructure.
However, subsidies are not a means to an end in themselves. Subsidies have been around since wireless started going main-stream decades ago. Some of our readership is young enough to not know that once upon a time, pretty much every phone was free with service. That T-Mobile has lower priced rate plans is an economic mandate of having the smallest physical network out of the four major carriers in the US and having been struggling to keep subscribers. It simply cannot command the same rates that AT&T and Verizon do, but know this - if it could, it would.
For the sake of argument, we put together a comparison which pits the three upgrade plans against each other, incorporating an assumption that $20 per month of the monthly recurring revenue is geared toward the subsidized cost of the phone. In this case, the upgrade is calculated every 12 months. For the remaining series of comparisons, we use the Samsung Galaxy S4.
EQUIPMENT COSTS BASED ON ASSUMED SUBSIDIES
We then compared options based on subsidized equipment cost in conjunction with a single line smarthphone plan offered by each carrier, without adding any other options (though we will note differences where appropriate), and contrast that with these new equipment payment plans using the upgrade where allowed.
We chose middle-of-the-road plans from each carrier, for T-Mobile, that mean the Simple Choice Plan with 2GB of data which is $60 per month. On Verizon, that is the Share Everything with 2GB of data which is $100 per month, and on AT&T it is the unlimited minutes with 3GB of data which comes to $99.99 per month (without unlimited text messaging for another $20).
UPGRADE COSTS INCLUDING CARRIER RATE PLANS
- Combined equipment installment payment, plus any applicable fees associated with the upgrade plan.
- The cumulative cost of service, installment payments and upgrade fees at six months and one year as allowed by JUMP! and Verizon Edge.
Adding AT&T's unlimited text option would have added an additional $240 per year.
We then compared these three upgrade plans on a level playing field, upgrading annually, accounting only the equipment charges. Annual upgrades used to be a common occurrence. While they are customer friendly, they are not very healthy to the carrier's bottom line. Before you go on a rant about "greedy corporations," remember that those profits allow them to sell you the latest gear, keep rate plans in check and if you have a retirement account, odds are you are invested in them anyway.
UPGRADE COSTS IF YOU UPGRADE ANNUALLY
Verizon Edge shines through with very competitive numbers, but then again, T-Mobile's JUMP! also includes full equipment protection against damage, loss and theft. That is an option on Verizon and AT&T plans and naturally they cost extra. Incorporating those costs bring Verizon Edge and AT&T Next more-or-less to parity with JUMP!
What can we draw from all this? Well, it reaffirms that T-Mobile is a great all around option for those on a budget, and it is even more affordable if you choose to upgrade only once per year. However, that is not telling you anything you did not already know. The other not-so-subtle nuances still come into consideration, choices in hardware, and coverage being the two most obvious options a customer must pay attention to. On a pure comparison of equipment cost as outlined in these plans, Verizon Edge is the least expensive of the bunch. AT&T Next is not a bargain in that it builds a 12 month upgrade cycle on a 20 month payment plan, effectively making you pay more for the equipment before allowing you to upgrade. T-Mobile’s JUMP! is well rounded and brings a lot of value to the game because of the equipment coverage that is part of the plan.
When you buy your equipment through a carrier, it has already paid its negotiated wholesale price to the manufacturer. That money is gone regardless of if you buy the device or not. A case and point is the recent report about Verizon being on the hook to OEMs for a cool $45 billion (mostly to Apple) in purchase agreements. Sprint acknowledged that it paid 40% more for its iPhone stock than its competitors. In fact, entering into its agreement with Apple, Sprint spent all its cash to do the deal and floated an additional $7 billion in debt. Despite that, Sprint’s rates did not go up even though its de-facto subsidies were much higher.
So why the disparity in service plan pricing? It is a simpler explanation than equations for subsidies for equipment. It is that and overhead, coverage and marketing. Verizon and AT&T have about 65% of the wireless market in the US, and pretty much 100% of the profits. They are also the only two major carriers that have managed to continuously grow its subscriber base over the past 10 years. They have larger (and older) networks. AT&T has had its share of network issues courtesy of demands from iPhone users back when it was an exclusive device. Now, it looks like AT&T is starting to get its act together and is building its LTE network at a rapid clip. Verizon has reinvested its profits and masterfully built out its LTE network, completing the process ahead of schedule. Sprint and T-Mobile have been stagnant on the subscriber front. Pretty much the only way to attract customers is through pricing (because frankly, T-Mobile cannot compete with Verizon with its network alone).
The number 3 and 4 carriers in the US have fresh infusions of cash and talent thanks to recent mergers and acquisitions to hopefully change the landscape of the market. T-Mobile is having a huge impact with its “un-carrier” branding, and it deserves credit for starting what will certainly be a trend for mobile equipment across the industry. T-Mobile’s (and the other carriers’) margin on equipment (not to mention accessories) is definitely higher than it is on its network. That is a big deal, because T-Mobile has launched a model that virtually guarantees it (and other carriers) will receive full retail for the equipment it sells, no matter what.