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Published: Friday, 4/5/2013 - Updated: 2 years ago

T-Mobile calls out competition, ends hidden costs for phones



Where, exactly, is your threshold for outrage?

Would you speak up if you were overbilled for a meal? Would you complain if you paid for a book from Amazon.com that never arrived?

Or what if you had to keep making monthly mortgage payments even after your loan was fully repaid?

Well, guess what? If you’re like most people, you’re participating in exactly that kind of rip-off right now. It’s the Great Cell Phone Subsidy Con.

When you buy a cell phone — an iPhone or Android phone, let’s say — you pay $200. Now, the real price for that sophisticated piece of electronics is about $600. But Verizon, AT&T, and Sprint are very thoughtful. They subsidize the phone. Your $200 is a down payment. You pay off the remaining $400 over the course of your two-year contract.

It’s just like buying a house or a car: You put some cash down and pay the rest in installments. Right?

Wrong. Here’s the difference: Once you’ve finished paying off your handset, your monthly bill doesn’t go down. You keep reimbursing the cell phone company as though you still owed it. Forever.

And speaking of the two-year contract, why aren’t you outraged about that? What other service in modern life locks you in for two years? In any other industry, you can switch to a rival if you ever become unhappy. Companies have to work for your loyalty.

But not in the cell-phone industry. If you try to leave your cell phone carrier before two years are up, you’re slapped with a penalty of hundreds of dollars.

If you’re not outraged by those rip-offs, maybe it’s because you think you’re helpless. All the Big Four carriers follow the same rules, so what are you going to do?

Last week, the landscape changed. T-Mobile violated the unwritten conspiracy code of cell-phone carriers. John J. Legere, T-Mobile’s chief executive, took to the stage not only to expose the usurious schemes, but to announce it wouldn’t play those games anymore.

It was a Steve Jobs moment: When somebody got so fed up with the shoddy way some business is being run that he reinvented it, disruptively.

At the new T-Mobile, the Great Cell Phone Subsidy Con is over. You can buy your phone outright, if you like — an iPhone 5 is $580, a Samsung Galaxy S III is $550. Or you can treat it like a car or a house: Pay $100 for the phone now and pay off the rest over time, $20 a month.

That may sound like the existing phone subsidy con, but it’s different in a few big ways. You pay only what the phone really costs. You don’t pay interest, and you stop paying when you’ve paid for the phone; in other words, your monthly bill will drop by $20 a month, just as it should.

T-Mobile doesn’t care what phone you use, either; if it works on T-Mobile's network, you can use it. And why not? Why shouldn’t you buy one phone you really love, and use it freely as you hop from carrier to carrier? Would you buy a car that uses only one brand of gas?

Yet another radical change: There are no more yearly contracts at T-Mobile. You can leave at any time. “If we suck this month, drop us,” Mr. Legere said. “Go somewhere else.”

In the new T-Mobile world, there are only three plans.

All come with unlimited phone calls, unlimited texts, free tethering (which allows your laptop to get online via your phone), and unlimited Internet. The only difference among the plans is how much high-speed wireless Internet you get each month: 500 megabytes ($50 a month), 2 gigabytes ($60), or unlimited ($70).

After you’ve burned through that much data, your Internet speed drops to 2G speeds for the rest of the month — suitable for email or pulling up a Web page, but much too slow for video. You can upgrade your plan for a given month, if you like, but the point is that you’ll never be penalized. In other words, T-Mobile’s new program has also eliminated the overage charge.

Over time, these plans can save you a huge amount of money compared with T-Mobile’s larger rivals. For a plan that matches T-Mobile’s $60 plan, Verizon would charge you $100 a month. Over two years, you’d pay $960 more.

For a plan that matches T-Mobile’s $70 plan, Sprint would charge you $110 a month. Over two years, once again, you’d pay $960 more.

This all sounds wonderful, but sooner or later we have to acknowledge the elephant in the room: T-Mobile can afford to be the disrupter because it’s in last place. It has the fewest customers and the smallest network coverage of any of the Big Four in the United States. It can take risks because it has nothing to lose.

Part of T-Mobile’s problem is that it’s famous for not offering the iPhone and not offering the fastest kind of Internet network, known as 4G LTE.

Fortunately, the company is tackling both of those drawbacks. On Friday, it will begin offering the iPhone 5.

The company also has managed to buy, merge, and lobby its way into ownership of more spectrum that will allow it to install LTE networks at last. The company says it will have 100 million Americans covered by LTE signal by summer, and 200 million covered by year’s end.

As long as T-Mobile had a sad little network running no-name phones, it wouldn’t matter what its policies were.

But once T-Mobile’s network and phones become contenders, the company’s much more fair, transparent, logical policies will suddenly matter. Those practices will have teeth.

The other carriers will have to start paying attention.

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