T-Mobile’s chief executive John Legere is a marketing genius. There’s no denying it. His antics have made a carrier that no one really cared about a few short years ago the talk of the tech press on a regular basis. What’s more, consumers are listening — T-Mobile added 4.4 million net new postpaid subscribers last year. In the fourth quarter of 2013, T-Mobile netted 869,000 new postpaid customers while its self-proclaimed top rival AT&T only gained 566,000 net postpaid subs. Make no mistake about it, those are phenomenal results and T-Mobile is, without question, the most important wireless carrier in America right now. That said, it’s time to clear the air. With tricky marketing and CEO Legere’s constant barrage of shocking commentary, T-Mobile has managed to convince U.S. consumers that it has eliminated cell phone contracts. Simply put, this just isn’t true.
This really, really needs to be clear: When it comes to the need to sign a contract for cell phones and cell phone service, T-Mobile has changed absolutely nothing as far as the consumer is concerned. Nothing at all.
If you buy a phone from T-Mobile and pay for it up front in full, you do not need to sign a contract. If you open a T-Mobile account and bring your own phone, you do not need to sign a contract.
In any other case, you need to sign a contract.
This is the same for every other wireless carrier in the U.S., and it has worked exactly this way forever. It’s nothing new. What T-Mobile has done, though, is eliminate wireless service contracts and switch to device contracts. This seemingly simple move opened the door for a wave of “no contract” marketing though, however questionable it might be, and it turned out to be a winning strategy.
Just like T-Mobile’s new device contracts, traditional service contracts are all about ensuring that carriers recoup the cost of the devices they sell. Customers pay a small up-front fee for a phone, and then the rest of the handset’s cost is spread out over the course of 18 or 20 or 24 or however many months. If the customer wants to leave before the end of his or her contract, the balance of the value of that phone must be paid.
With traditional wireless service contracts, that balance was recouped by the carrier in the form of an early termination fee (ETF). ETFs, in a sense, masked the fact that the sum owed related to the device rather than the service itself, and by doing that carriers were able to charge a flat fee and make even more money when subscribers left near the end of their contracts (this horrible, dastardly policy has since changed at some carriers like AT&T, which now reduces its smartphone ETF by $10 for each month of completed service). With T-Mobile’s new setup, that money is still recouped — and subscribers are still contracted to pay that remaining balance — but it’s no longer called an ETF.
Of course, it doesn’t matter at all what it’s called. As a T-Mobile subscriber, you are under contract to pay the full price of your phone.
Look, T-Mobile is shaking things up. John Legere is shaking things up. It’s working. The scrappy “maverick carrier” is changing the wireless industry for the better, and it is attacking several pain points along the way.
T-Mobile’s service plans are outstanding — the cheapest in the country by far among top carriers. Its new international roaming perks are heaven-sent for many travelers. And T-Mobile’s offer to pay families’ contract termination fees when they switch to T-Mobile from a rival and trade in their current phones was a stroke of brilliance. It was so brilliant, in fact, that AT&T copied it with a limited-time promotion before T-Mobile even made its offer official.
T-Mobile also removed the phone subsidy from its monthly rates while other carriers build that expense into their plans even once a phone is full paid for. As has been the case since T-Mobile launched its Uncarrier efforts, however, the industry is starting to follow its lead there as well — AT&T recently announced reformulated service plans that drop in price once the subscriber’s phone is paid for.
But T-Mobile has not — not — eliminated cell phone contracts. Whether you use T-Mobile, Sprint, AT&T or Verizon Wireless, and whether you opt for a traditional service plan or a reformatted plan like T-Mobile’s plans or AT&T Next, you cannot leave your carrier without paying the total cost of your phone, and you will sign a contract that states as much. Period. Full stop.