T-Mobile's New Strategy: Can It Be Sure Verizon, AT&T Won't Follow?
T-Mobile is looking to upend the mobile market with a strategy it expects its larger rivals won't copy. But can it be so sure?
During T-Mobile parent-company Deutsche Telekom's Capital Markets Day Dec. 6, T-Mobile CEO John Legere for the first time shared T-Mobile's plan to offer in-demand smartphones unsubsidized, but with monthly financing plans and no annual contracts.
"We're going to innovate on a few things, innovate the value plans. ... We are going to get devices into the market [including an Apple iPhone] at a price that beats the rest of the industry," Legere said during his presentation.
He added, "We think there is huge room for a challenger to change some of [the things that bother consumers] in a way that the larger players will not be able to or will choose not to respond to."
AT&T, however, isn't closed to the idea.
During the company's Jan. 24 earnings call, AT&T Chief Financial Officer John Stephens told analysts that AT&T will soon have to respond to some new "dynamics in the marketplace" and that T-Mobile's new handset financing ideas are "interesting."
"That's something we've looked at on several occasions. I kind of like the idea. I commend them for trying it," Stephens said. "It will be something we're going to be watching, how it is received in the market place. And in terms of other players, it's just—it's hard to say what the dynamic will be. But I think it will be just a little bit of open-field running this year."
Eric Costa, a research analyst with Technology Business Research, doesn't expect any of the Tier 1 operators to follow T-Mobile down the unsubsidized route in the next two years.
"AT&T and the others are definitely keeping an eye on the outcome at T-Mobile, as reducing equipment subsidies would help significantly lower operating costs," Costa told eWEEK. "However, AT&T and Verizon are having success with their shared data plans and will not want to alter these plans any time soon by cutting device subsidies."
Verizon executives hinted at as much during an earnings call Jan. 22. While they didn't address T-Mobile directly, in discussing how smartphone margins might be improved, they said that the burden of subsidies has been helped by subscribers switching to Verizon's new data plans and using its Long Term Evolution (LTE) network.
Executives expect that margins will also improve as more consumers look to phones beyond the iPhone.
"We now have the Windows platform in our mix and saw some steady, albeit slow, increase in some of the uptake of that platform," said Verizon CFO Fran Shammo. "But as we get more and more platforms in the mix—and now we have RIM out there again—there is going to be incremental competition. There will be subsidy reductions as there was in the basic phone history in the ecosystem."
When Legere announced T-Mobile's plans to offer the iPhone and financing in lieu of subsidies, he acknowledged Sprint in an aside, saying, "This is not a volume commitment the size of what Sprint agreed to or anything close to it."
Sprint, it was well reported, took on an enormous amount of debt in order to offer the iPhone. And while Sprint's recent deal with Softbank has helped alleviate much of that burden, Costa said it has also put Sprint in a better position to negotiate hardware deals.
"Softbank will now allow Sprint to get better purchasing deals on devices due to its larger scale than before," he said. "Sprint will not want to risk the negative potential of upsetting subscribers by cutting subsidies now that it will be able to offer the same devices as AT&T and Verizon at very similar costs."