T-Mobile's decision to stop subsidizing devices suddenly makes a lot more sense

By Nathaniel Mott , written on December 20, 2012

From The News Desk

Smartphone prices don't make any sense, and it's all the carriers' fault. That's the argument put forth by The Verge's Chris Ziegler, who compares the current smartphone pricing system to walking into a car dealership and being able to purchase a 2012 BMW or a 2013 Volkswagen for the same price.

Because most people buy carrier-subsidized devices and upgrade once their contracts are up, the carriers have to do some pricing gymnastics to keep selling devices. That's why phones that were $199 just a few months ago can suddenly drop to $149 or $99, and why manufacturers are encouraged to release as many devices as possible in order to stay relevant.

Ziegler makes a good argument, and his conclusion that the mobile industry is "eating itself alive" rings true. So long as AT&T, Sprint, and Verizon continue with their arcane pricing practices, the difference between a "good" phone and a "bad" one becomes ever-murkier and leads to so-called "shovelware" that fills the market with poor devices. There is one carrier who isn't going to play this game anymore, however: T-Mobile.

T-Mobile previously announced that it would no longer subsidize devices, requiring customers to pay the full price for their smartphone up front. This would not only reduce T-Mobile's costs, CEO John Legere said, but would also "change [the subsidy model], in a way that the larger players will not be able to or will choose not to respond to."

Rather than paying $199.99 for a subsidized iPhone 5, which is coming to T-Mobile next year, customers would pay the full $649 out of pocket. T-Mobile's argument is that removing the subsidy would allow it to charge less for monthly service, creating a larger barrier to entry but making it less expensive in the long term.

There's precedence for this model, as Reuters reports that 80 percent of T-Mobile's customers buy their phones outright already. And, if Google's Nexus 4 is any indication, devices might go down in price to make that non-subsidized pill easier to swallow.

Again, the base-model iPhone 5 costs $649 off-contract. The Nexus 4 costs $300. So long as T-Mobile isn't subsidizing either device, it's unlikely that the cost will drop as quickly as it does when AT&T and Verizon pass them through the pricing cycle. (The Nexus 4 isn't offered on-contract by either carrier, but the concept can be applied.)

Which means that at least one carrier is moving away from the shovelware-composed dirge of the mobile industry. Sure, it's the No. 4 carrier, but it's still promising. Customers may not like it at first – "What do you mean we have to pay what the phone actually costs? This is 'Merica!" – but if it leads to better devices and long-term savings, it should be counted as a win.

[Illustration by Hallie Bateman]