The Exchange

Look Who Else Is Coming to Dinner

The Exchange

By Robert Hahn and Peter Passell

Think you know where the wireless marketplace is headed? Think again.

The latest twist is a turn away from device subsidies, the business model that has long dominated industry pricing because it reduced sticker shock on handset acquisition.  The strategic shift, initiated by a reinvigorated T-Mobile, eliminated subsidies for new customers at the start of 2013, has now been embraced by AT&T’s CEO Randall Stephenson. He flatly declared that wireless operators could not afford to sell high-end smartphones for $300 or $400 below cost – and (though unstated) expect to earn it back in subscription fees.

Stephenson’s observation followed the introduction of AT&T’s new pricing plans by just a week. They shave monthly costs for customers who sign service contracts for phones they already own or agree to combine with the full-price purchase of a new model (financed with a loan from AT&T).  The new pricing option, which Consumer Reports proclaimed “good news for consumers all around,” is a tacit acknowledgement that T-Mobile got a jump on its rivals.  It is also just the sort of punch-counterpunch expected in a highly competitive market – one in which the upstart T-Mobile is now signing up more new customers than either of the two industry leaders, AT&T and Verizon.

More fundamentally, the shift of AT&T and T-Mobile to a financing model long embraced by auto companies and sellers of pricey consumer durables, shows that the carriers continue to seek market share by poaching customers from one another. A positive response could compel other carriers to follow suit, effectively creating a new industry standard to replace the subsidy model. 

T-Mobile’s walk on the wild side of marketing is an ironic product of the company’s failed purchase by AT&T. That outcome yielded big benefits for T-Mobile -- just not the ones anticipated.  The spectrum licenses and $3 billion in cash T-Mobile received from AT&T as a door prize for the aborted deal provided an important kick start.  Moreover, it seems to have galvanized (reluctant) corporate parent Deutsche Telekom to provide additional capital and encourage a merger with MetroPCS, leaving T-Mobile in a far better market position anybody was predicting a few short years ago.

A lean and mean T-Mobile is good news for wireless consumers, who also stand to benefit from the revitalization of Sprint, which is betting on a massive upgrade of its network to begin drawing customers from rivals. The financial muscle behind the strategy is Softbank of Japan, which spent $21.6 billion for an 80-percent share of Sprint earlier this year and is pouring in additional billions in a bid to make Sprint’s network the fastest in the U.S.   Indeed, capital spending by the two companies is part of a broad investment spree by wireless carriers, projected to hit $34-$36 billion annually for the next several years. 

All this has apparently made an impression on the new FCC Chairman Tom Wheeler, who approvingly noted that the number three and four carriers still have the will to compete vigorously and the way to raise capital to manage it. The Commission will have ample opportunity in 2014 to show that it’s paying attention by formally acknowledging the state of competitive play in its annual report on the wireless market -- and accordingly, by creating a level playing field for bidders in the coming spectrum auction.  Sprint and T-Mobile have been trying to position themselves as “little guys” who need special help from Uncle Sam. But their case, which was never very strong, is looking feeble in the wake of their ambitious expansion plans.

Robert Hahn is director of economics at the Smith School, University of Oxford, and a senior fellow at the Georgetown Center for Business and Public Policy. Peter Passell is a senior fellow at the Milken Institute, a Santa Monica-based think tank, and editor of the Milken Institute Review.

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