T-Mobile Opens the Door for Mobile Shakeup

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Deutsche Telekom subsidiary T-Mobile has opened the door to the end of the trend of heavily subsidizing smartphones, a practice that is common in the US but relatively rare elsewhere. Rivals AT&T (NYSE: T) and Verizon (NYSE: VZ) are watching closely, but other players in the market have a lot at stake too. Finnish giant Nokia (NYSE: NOK) and chip titan Intel (NASDAQ: INTC) stand to gain tremendously if there is a shift in the current state of mobile.

It all begins with the current subsidy-based model. For instance, every subsidized iPhone sold on contract by AT&T costs the telecom company $450, one of the key factors in the contract-based structure. Without subsidies, pay as you go becomes a more attractive option and takes away a major cash outflow at the beginning of a contract cycle.

In T-Mobile’s case, the company has announced it will soon carry Apple's (NASDAQ: AAPL) flagship device, the iPhone, but also intends to cut the two-year contract and with it, subsidized prices. The shift from subsidies comes with a $70 unlimited everything plan, which the company hopes will reverse the current exodus from their network. T-Mobile has struggled to compete with AT&T and Verizon this year, primarily because they have fallen behind in the endless network upgrade cycle.

The big question is whether Americans are willing to pay more for their phones upfront for a potentially cheaper, contract free experience. If T-Mobile’s move is well received, one could expect Verizon and AT&T to quickly follow suit, which may affect the prices of smartphones. Currently price isn’t a major point of competition (in the US) for smartphones, however once subsidies are removed it could spark a price war.

There is already some evidence that in the absence of subsidies cheaper phones prevail. For example, IDC predicts Android will continue holding the number one spot for mobile operating systems due partly to the availability of cheaper devices in developing countries. Given that these are also countries that do not typically subsidize smartphones, it does support the argument that price matters.

This week Nokia announced better than expected sales of its Lumia line, a bright-spot in what has been a rough few years for the company. While a lot is being said about the sales volume, the more interesting factor is how aggressively priced Lumias were during the period in question. The flagship models were priced aggressively from the start, debuting at the $100 price mark usually reserved for last year’s model and during the holidays were also discounted heavily. The point is, as you would expect, price plays a role.

Confirming this is IDC’s argument that Apple’s iOS will continue to lag behind Google’s (NASDAQ: GOOG) Android OS until Apple begins to offer a cheaper iPhone. The company has also seen increased penetration in areas where they’ve offered last year’s model at a discount. Interestingly, this week there was a report from Digitimes (quickly corroborated by WSJ and other news outlets) indicating Apple was indeed exploring a cheaper iPhone for emerging markets. While this is obviously a play designed to help expand their presence in emerging markets, a cheaper iPhone could also come into play stateside should subsidies vanish. It would give Apple another option and perhaps offset potential market share loss if consumers are forced to pay the full retail price.

Intel, however, is taking the opposite route. Since the company has yet to gain mobile traction in the US, they’ve turned their focus to low-cost but powerful mobile chips to gain a foothold in emerging markets. As it stands, the chip-manufacturer has seven smartphones in the global market, all designed to be competitive but relatively low-cost. Should T-Mobile’s move to strike subsidies catch on, it may present an opportunity for Intel to finally grab a piece of the US mobile market. Additionally, given the company’s expertise in chip fabrication and overall scale, if smartphone manufacturers are forced to compete on price the company may also pick up new foundry customers.

Ultimately the biggest winner could be Nokia. Until being dethroned by Korean giant Samsung, the company excelled at producing low-cost mobile phones that dominated the global market. The company missed the shift to smartphones, but still has the expertise to compete, particularly if there is a shift to lower cost smartphones. As pointed out above the company has already demonstrated a willingness to compete on price and has a significant amount of experience as a low-cost producer. Also worth noting is though they are currently tied to Microsoft and its operating system, at CES they announced an openness to other opportunities in the future. A shift in the smartphone market that moves towards Nokia’s strengths could be what helps the company finally get back on solid footing.

Regardless of how things play out in the near term, two things are certain: Subsidies will eventually disappear and the mobile landscape will change in response. When the changes do come, companies prepared to compete on price will likely be the victors and are worth keeping an eye on.


TigerAnalyst owns shares of Intel. The Motley Fool recommends Apple, Google, and Intel. The Motley Fool owns shares of Apple, Google, and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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