T-Mobile kills device subsidies

T-Mobile USA will eliminate all device subsidies from its rate plans in 2013. During Deutsche Telekom's annual investor conference, T-Mobile CEO John Legere said that customers will be able to pay an upfront fee for their devices and then pay the balance of the device in affordable monthly installments.

T-Mobile's move is a striking change for the industry, as all Tier 1 operators for many years have subsidized the cost of devices in exchange for customers agreeing to a two-year contract. Currently T-Mobile offers Classic plans that subsidize the device and require a two-year contract and Value plans that let customers pay the full cost of their smartphones or pay it off in monthly installments in exchange for lower monthly plan rates. Legere said that in 2013 T-Mobile will eliminate its Classic rate plans that include device subsidies and instead only offer Value plans to customers.

"We think there is a huge room for a carrier to change in a way that the larger players will choose to or will not be able to respond to," Legere said. He noted that the Value plans T-Mobile will offer next year will be "fair and simple pricing" with "low out of pocket expenses" for consumers. While not alluding to the iPhone specifically, he said that customers may be able to purchase the "most iconic device in the world" for $99 and then pay monthly installments of $15 or $20 over the next 20 months.

Although Value plans have lower margins than T-Mobile's traditional Classic plans (33 percent compared to 46 percent for Classic), Legere said the switch makes sense because T-Mobile will eliminate costs associated with device subsidies. He also said Value plan customers tend to stay two months longer than Classic customers do.

 Legere also provided some insights into how T-Mobile plans to compete in 2013, nothing that the company is going to tackle some of the problems that have dogged it over the past few years. "I'm very certain in the coming months you are going to see dramatic change," he said.

Specifically, T-Mobile will aggressively battle AT&T Mobility (NYSE:T) in its advertising beginning in the spring when the MetroPCS acquisition is expected to close. AT&T tried and failed last year to purchase T-Mobile for $39 billion. Legere said one element of the advertising could be summarized as, "You love your iPhone, you hate AT&T."  He said: "I want you to get used to that tone because that is the way we're going to play."

Legere did not provide specifics on the company's plans to offer Apple (NASDAQ:AAPL) products, which was announced earlier today. However, he did say that when the company launches Apple's products, it will be dramatically different. He also said that T-Moible had not made a volume commitment to purchase Apple products on size of what Sprint Nextel (NYSE:S) has committed to "or anything close to it." Sprint last year inked a four-year, $15.5 billion deal to sell the iPhone.

Legere said the deal is a missing piece of the puzzle for T-Mobile. "What was missing? It's very clear," he said. "A certain number of customers wouldn't come to the store if we didn't have the iPhone. … We worked very hard for a deal that makes sense for us."

Here is a breakdown of the other topics that were discussed.

Network: T-Mobile EVP and CTO Neville Ray said by year-end T-Mobile will have 100 million POPs covered with HSPA+ on 1900 MHz, 170 million will be covered by mid-2013 and 200 million covered by the end of 2013. In markets where it has refarmed the spectrum, Ray said that voice traffic has increased 10 percent and data traffic has increased 29 percent, while the number of dropped calls have fallen 74 percent and blocked calls have fallen 34 percent.

Finances and regulatory approval: MetroPCS CFO Braxton Carter said that the combined company will produce service revenue in 2013 of $20.8 billion to $21 billion, compared to the estimated $16.4 billion to $16.6 billion T-Mobile would have produced on its own next year. He also said the combined entity's EBITDA for 2013 will be $5.8 billion to $6 billion, and that its margins will be 27  percent to 29 percent. Capital expenditures for the combined company will total $4.7 billion to $4.8 billion as T-Mobile rolls out its LTE network and completes its network modernization.

Carter said that regulatory approval for the deal is moving along and that he expects the FCC to approve the deal by April 24, 2013, the expiration of the FCC's 180-day "shot clock." Carter said all other regulatory approval processes are going as expected. 

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