Service Charge

3 minute read

“This industry blows,” T-Mobile ceo John Legere announced on Jan. 8 at the International Consumer Electronics Show (CES). That might seem like an odd statement from the leader of the fourth largest wireless carrier in the U.S., but it’s also–from a consumer standpoint–an accurate one.

For a decade, the U.S. wireless business has used the same basic model: carriers entice customers with heavily discounted phones, then hook them with two-year service contracts and sky-high termination fees (as much as $350 for a new iPhone with Verizon) so they can’t easily switch if a better deal appears elsewhere. And although carriers battled one another to build superior networks and gain exclusive access to popular phones, they didn’t challenge the fundamentals of the business. The profit margins were too lush.

But now that in-demand models like the iPhone are available on all carriers and the new-customer well is drying up (more than 90% of American adults have a cell phone), the race is on to keep current customers happy–and to poach from the competition, at any cost.

To that effect, T-Mobile announced an unprecedented offer at CES: if you switch to its service, it will pay your termination fee (up to $350) to Verizon, Sprint or AT&T and give you as much as $300 in credit toward a new phone. And it won’t require you to sign a two-year contract. “They’ve decided to operate at a lower margin and be a value player for the market,” says mobile analyst Chetan Sharma. “That’s putting a tremendous amount of pressure on everybody on top of them.”

This isn’t the first time T-Mobile has caused a stir. Last year, for example, it started allowing customers to upgrade their phone twice a year (for an extra $10 per month with insurance), forcing Verizon and AT&T to follow suit with similar programs. It also abolished two-year contracts–instead, customers pay monthly installments for the phone they get up front–and lowered international roaming fees, helping it attract some 2 million new monthly subscribers after years of shedding them. Perhaps that’s why, five days before T-Mobile’s CES announcement, a competitor tried to pre-empt it: AT&T announced it would pay as much as $450 in credit to lure T-Mobile customers.

Given that these carrier wars are on track to intensify in 2014, it’s likely that the U.S. mobile market will slowly start to resemble the ones in Europe and Asia, where long-term contracts are rare, international calls are cheap and consumers pay for their phones directly, either up front or in installments. (This may well force Apple and Samsung to build cheaper phones.) All of which is good for consumers–and for T-Mobile, apparently. As Legere put it at CES, “We are either going to take over this whole industry or these bastards are going to change.”

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