T-Mobile plans to ditch phone subsidies

Sinead Carew for Reuters:

T-Mobile USA said on Thursday it planned to stop subsidizing smartphones, the first major U.S. carrier to do so, in a move it hopes will cut costs and woo customers frustrated with restrictions on upgrades in longer-term contracts.

It’s an interesting move. Hot on the heels of the announcement that T-Mobile USA will begin offering its customers iPhones in 2013 comes this news.

Subsidies on phones have made it possible for American consumers to give in to their voracious appetite for shiny new hardware as it’s released, but it also provides a certain amount of vendor lock-in, as contracts require customers to endure lengthy periods without risking expensive penalties.

T-Mobile USA wants to change the game by making customers pay for the cost of their phones up front, but offering more lenient terms for phone upgrades on the back end. Of course, customers are still going to have to get over the very bleak idea of having to pay full retail price for their phones – sticker shock may overwhelm their desire to have a more fair cell service contract.

It’s something that hasn’t been done by major American phone carriers before now, and it could help T-Mobile USA differentiate itself against its three main competitors, AT&T, Verizon and Sprint.