Carrier Subsidies and Fuzzy Math

Fuzzy Math

Ol’ G Dubya is out of the Whitehouse but we’ve still got a lot of fuzzy arithmetic to sort through. T-Mobile is the latest guilty party, what with their advertising reaching the level of “deception”. I’ve got nothing against profits but I’d like to do a little math for the consumer.

A quick comparison

Let’s quickly compare AT&T, Verizon and T-mobile’s pricing on service plans. For the sake of argument, we’re going to do ~500 minutes, unlimited texting and “unlimited” data.

  • AT&T: ~$100 per month, $2400 revenue over the life of the contract
  • Verizon: $90 per month, $2160 revenue over the life of the contract
  • T-Mobile: $70 per month, Month to Month contract, $1680 revenue over 2 years
Note: only AT&T actually provides less than unlimited minutes on their cellular plan.

A tale of two business models

AT&T and Verizon both offer Cellphones on contract and provide a subsidy to you so that you can buy a phone for cheap or free. Let’s look at the iPhone 5 16GB, for example.

  • AT&T: $199 with a two year contract
  • Verizon: $199 with a two year contract
  • T-Mobile: $99 with a two year financing agreement

So on AT&T, the phone costs AT&T ~$600, and they give you a $400 discount. Same thing with Verizon. For this discount, AT&T/Verizon apply a termination fee to recoup this discount in the event you leave. T-Mobile, on the contrary, sells you the phone for $99, but then charges you $20 a month for 24 months, for a full cost of $579 (0% financing though!). So let’s look at how much money these companies take in for each customer that stays on for 2 years:

  • AT&T: $2000 ($2400 minus $400 subsidy)
  • Verizon: $1760 ($2160 minus $400 subsidy)
  • T-Mobile: $2160 ($1680 PLUS $480 financing)

Yes, T-Mobile now makes 8% more than AT&T per subscriber thanks to their new business model. Yes, T-Mobile is the most expensive provider in the country if you buy a phone from them. It appears freedom comes at a price.

Buyer Beware

If you use T-Mobile with your own phone it is the cheapest service in the country (provided by one of the big 4). If you buy an iPhone 5 from T-Mobile, it is the most expensive iPhone 5 in the country. Pay attention to carrier pricing; it isn’t obvious which one is the best deal. I can understand why T-Mobile is pushing this new pricing; instead of losing money on every handset they sell, they make a significant amount of revenue. It takes a loss leader and turns it into a profit center, which is beautiful to corporate accountants.

I think that T-Mobile should be focused on subscriber acquisition, not on selling the biggest and baddest devices on Earth. If T-Mobile pushes the angle of “join us without a contract” as opposed to “an iPhone without a contract” their growth will be much more aggressive. Playing on the ignorance of consumers will not work well in the long run, the temporary gains are more than offset from the inevitable backlash.