Analyzing T-Mobile's Change In Price Strategy

The No. 4 mobile phone carrier is making changes that it hopes will draw more customers to it. To find out more about T-mobile's new pricing strategy, David Greene talks to Rich Jaroslovsky, the technology commentator for Bloomberg News.

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DAVID GREENE, HOST:

And to talk more about T-Mobile's new pricing strategy, we reached Rich Jaroslovsky. He's technology commentator for Bloomberg News and a regular guest on our program. And Rich sounds busy there in the Bloomberg newsroom in San Francisco. How are you?

RICH JAROSLOVSKY: I'm fine.

GREENE: Let's talk about what we're hearing from T-Mobile. I mean, how radical a change is this for a U.S. carrier?

JAROSLOVSKY: For a U.S. carrier, it's big. But they're basically doing is cutting out the subsidies. Now, carriers have had a love/hate relationship with these subsidies for a long time. That's the money that they pay to device manufacturers, like Apple and Samsung, in order basically to subsidize the sale of the smartphones. So what they're doing is getting rid of the subsidies, which raises the cost to consumers of the phones, but they're coming out with a reduced pricing plan for the actual service that they provide. So it's a very different model.

GREENE: So does that mean I now have to go get a phone first and then bring it to T-Mobile to start my service, or how does it work?

JAROSLOVSKY: No. But still show you the phones. And, in fact, the let you pay them off over time interest free, depending on the deal that you get. But you'll be paying, instead of paying, say, $200 for an iPhone 5, you'll be paying over $600 for it. But the trade-off is no two-year contract and presumably, lower monthly fees. So in some ways it's a gamble for T-Mobile, which has been the number four carrier, and which has been struggling very much to find its way in the world that is increasingly dominated by Verizon and AT&T.

GREENE: And Sprint is the third of the top three.

JAROSLOVSKY: Sprint is the third. Now Verizon and AT&T, of course, are big enormous companies with deep pockets. And Sprint, which at one point wanted to merge with T-Mobile, instead went out and found itself a deep-pocketed partner in Japan's Softbank. So they've got lots of resources that they can pour into building new networks and that sort of thing, whereas T-Mobile, which has been controlled by Deutsche Telekom, has really been the also-ran. And so they really had to roll the dice to do something to change the dynamic. And this is a pretty big roll of the dice.

GREENE: OK. So they're rolling the dice. They're taking this gamble. They're hoping that people might be frustrated with these long-term contracts and looking for another option. Is that the case? I mean, are people frustrated? Will they get more customers?

JAROSLOVSKY: People are frustrated. And, you know, I think that the other carriers are going to be watching this very, very carefully because even AT&T and Verizon are not happy about the subsidies that they've had to pay to the manufacturers, and so they're looking to see if this model works as well. It is in use in other countries. It's been in use in a lot of southern European countries. Denmark, I believe, also has an unsubsidized phone market but nobody has tried it in a market this large and this important.

GREENE: And so Rich, what is your read? I mean is this new option that T-Mobile is offering a good deal for consumers?

JAROSLOVSKY: I think it could be a good deal for consumers. But it will be a more complicated deal for consumers to figure out because they have to take into account how much they are paying for the phone every month, how much they're paying for the services every month, and they're going to have to come up with a down payment for the phone. So they may be paying more money up front, even though over time it will be a better deal for consumers. And the question is then, you know, how good a job can T-Mobile do at explaining to people why this is in their better long-term interests?

GREENE: Rich, I know you're in your busy office. I'll let you get back to work. Thanks so much for talking to us.

JAROSLOVSKY: Thank you.

GREENE: That's Rich Jaroslovsky. He is technology commentator for Bloomberg News and a regular guest here on our program.

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