How can T-Mobile Afford to Pay Early Termination Fees?

by Matt Klassen on January 10, 2014

It’s been a busy week for T-Mobile CEO John Legere, from getting kicked out of AT&T’s press event to unveiling his company’s paradigm altering UnCarrier 4.0 plan, whereby T-Mobile will pay the early-termination fees (ETF) for customers and family plan members, removing the most significant barrier consumers face when considering switching carriers. As part of the promotion T-Mobile will pay up to $350 per line (for up to 5 lines) and up to a $300 credit for the old smartphones customers trade-in.

But while T-Mobile has blazed a trail through the traditional red tape of the wireless industry, one has to wonder, how can the company afford to do this? While the wireless industry is a multi-billion dollar industry carrier’s profit margins are often razor thin, particularly with carriers subsidizing phones and attempting to recoup their short term losses over the course of a multi-year postpaid contract.

However, according to T-Mobile Chief Marketing Officer Mike Sievert, Chief Technology Officer Neville Ray, and Chief Financial Officer Braxton Carter, while it may look like T-Mobile’s new UnCarrier 4.0 promises to be a never-ending money pit, the economics of it remain the same as they always have: recoup initial losses over the long term.

Truthfully as paradigm altering as T-Mobile’s various UnCarrier strategies seem to be, the economics of the company’s entire plan remains largely the same: profit over the long term. In fact, while T-Mobile is using wireless jargon to its maximum effect, the reality of the situation is that T-Mobile is not really doing anything differently, its just shunting money into attracting customers that it would have likely just spent elsewhere.

Under the wireless industry’s revenue structure customers are able to purchase expensive smartphones because carriers heavily subsidize them, paying money to the phone manufacturers up front that customers then paid back over the life of a multi-year contract. Here T-Mobile is no different, offering new subscribers $0 smartphones on a 24 month postpaid contract. Doesn’t sound very UnCarrier to me.

So lets not get caught up in semantics here: T-Mobile has not eliminated early termination fees (you’ll certainly have to pay them in some form if you want to leave T-Mobile), they haven’t eliminated subsidies (at least not with this particular plan), and they aren’t really doing anything differently. As Maribel Lopez, principal analyst at Lopez Research, explains, Legere hasn’t changed the economics of the wireless industry; he “just made it more transparent.”

But the question remain, how can T-Mobile afford such a strategy? As the company CFO explains, the financial hit will likely not be that bad, with the company estimating that the average payout per line will be closer to $150, rather than the maximum of $350, noting that the customers who are well into their contract won’t have such onerous fees. Further, the company says it will be able to refurbish and resell those trade-in phones, further reducing the overall cost.

The truth of the matter is, though, that T-Mobile really hasn’t really done anything worthy of the moniker UnCarrier here, its simply doing what its already accused its rival AT&T of doing, greasing the wheels for customers to leave their old carriers, a little bit of bribery that ultimately leaves Legere looking a mite hypocritical.

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Written by: Matt Klassen. Follow by: RSS, Twitter, Facebook, or YouTube.

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