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Earlier this year, the new exec team at T-Mobile, led by CEO John Legere and CMO Mike Sievert, must have sat down at a conference table at the company's Seattle area headquarters and asked two questions: 1) What are the top things about the wireless operators that annoy customers the most? 2) Which of these can we address...and still stay in business? Thus was birthed TMO's "Un-carrier Strategy". Round 1, announced in March, took on contracts and handset subsidies. Round 2, announced today in New York, takes on handset upgrade policies, which leading operators AT&T and Verizon Wireless have tightened in recent months. Before analyzing the new plan offerings, kudos are due the TMO network team for the quick integration they've pulled off with Metro PCS, as well as the swift progress on LTE. The Four Majors realize that LTE has to be available to the vast majority of their footprint by mid-to-late 2014 in order to be competitive in the U.S. wireless market. We will then start moving from strategic to tactical with LTE claims: instead of who has the most POPs rolled out, it will be more about real performance metrics, such as download speeds, latency, video performance, and so on. Family Plan T-Mobile has extended its Family Plan to those who don't have credit. These customers have access to the same Family Plan offerings as credit-worthy subscribers, except that they must pay the monthly fee in advance. Clearly, this reflects Metro's influence on the newly merged companies. T-Mobile also realizes that it will be very difficult to grow subscribers unless it can somehow chip away at the family plan fortress dominated by Verizon Wireless and AT&T. T-Mobile might call this part of their "un-carrier" strategy. More broadly, this reflects a merging of the post-pay, pre-pay, and advance pay "categories". There is, simply, an expansion of options for device procurement, ownership, and service plan structure. And, the wireless industry is getting a little smarter about market segmentation. TracFone gets this better than most. JUMP The signature element of T-Mobile's announcements today is JUMP, which allows subscribers to upgrade their device up to twice a year, for the same price a new subscriber would pay for the (subsidized or financed) phone. Typically, a subscriber who purchases, say, an iPhone at a subsidized price, has to wait 24 months to upgrade the device. Switching to another operator triggers an early termination fee; upgrading early requires the subscriber to pay the full retail price or an early upgrade fee. In order for a T-Mobile subscriber to be eligible for JUMP, they must: pay $10 per month for the JUMP program, which T-Mobile has cleverly bundled with handset insurance (which is currently bought by about 25% of smartphone subscribers); wait 6 months following the purchase of the first device; and be on an equipment installment plan (EIP). When the subscriber upgrades under the JUMP program, T-Mobile takes back the subscriber's existing phone, presumably to sell it as a refurbished device. The EIP clock is "reset", and the subscriber pays installment pricing on the new device. JUMP Economics JUMP is a bit of a complex equation for the subscriber. It's sort of like deciding whether to get dental insurance: how much dental service do you think you'll need over the course of a couple of years, plotted against the monthly premium, annual maximum benefit, and what procedures are covered. What the subscriber gains here is flexibility. For the subscriber who wants to upgrade their device more frequently than the average, JUMP makes a lot of sense. They pay more out of pocket costs for equipment-related expenses, gaining flexibility of upgrading when they want, plus the added benefits of insurance, which I think an increasing number of subscribers will opt for with smartphone growth. I did an exercise where I took two scenarios: a T-Mobile subscriber using Jump aggressively, buying an initial iPhone and then replacing it in months 7, 15, and 21; and an AT&T subscriber who buys a subsidized iPhone for $199 and replaces their iPhone with a new iPhone after one year in each of two years, at a $200 discount (because the contract is re-set). Since the AT&T subscriber owns their phone, I assume that they receive $200 for a "trade in" for their year-old iPhone. I used a retail price of $650 for the iPhone. Subscriber Economics T-Mobile Subscriber AT&T Subscriber Buys iPhone Month 1 for $146 Buys New iPhone Month 1 for $199 New iPhone Months 7, 15, 21 for $146 Buys new iPhone Month 15 for $450 Pays $21 EIP 24 months Buys new iPhone Month 25 for $450 Pays $10 Jump plan 24 Months Gets $200 for each iPhone traded in Over a two-year period, total "Equipment" Outlay: $1328 for a TMO Subscriber, $735 for an AT&T subscriber ($903 if they buy insurance). TMO subscriber has four new phones over 25 months, AT&T subscriber has three new phones. The TMO subscriber also spends $1,000-1,500 less on monthly access fees over the period, depending on whether the equivalent AT&T plan would be 2 GB or 5 GB of data for an individual line. Operator Economics T-Mobile Economics AT&T Economics Pays $2,016 x 4 iPhones Pays $451 initial subsidy Receives $504 in EIP Pays $200 subsidy for Month 15 iPhone Receives $240 in Jump payments Pays $200 subsidy for Month 25 iPhone Receives $450 for 3 iPhone refurbs Here, TMO's total equipment outlay is $660, while AT&T's is $850. AT&T makes this up in the form of higher monthly access fees. This analysis shows that the economics for T-Mobile and AT&T are similar, not accounting for other economic benefits, such as customer NPV, reduced churn, early termination fees for the AT&T subscriber if they leave, or the difference in monthly fees. It all boils down to flexibility and choice. The T-Mobile subscriber is paying a premium for the ability to replace their devices more frequently (and the added benefits of insurance), and also for not being in a contract. But the subscriber is also saving $1,000-$1,500 over the 24-month period. The AT&T subscriber does not get to replace their device as often and has lower out of pocket costs for devices, but pays higher monthly access fees and the risk of an ETF if they leave prior to contract expiration. So, Is JUMP a Good Idea? In the intensely competitive wireless market, with smartphone growth showing signs of maturing and most new adds coming from taking share from a competitor, operators are going to have to do make more outside the box moves to differentiate. TMO is clearly tapping into the group of subscribers who would upgrade more frequently...if they could. Certainly T-Mobile will steal some subscribers, who are attracted to the JUMP concept and other elements of the "un-carrier" pitch. Even more importantly, this is a major initiative to reduce churn. A subscriber who is on an EIP and then additionally investing $120 per year for the "privilege" of an early upgrade, is less likely to churn, assuming other elements of the experience meet expectations. JUMP could also help T-Mobile re-engage with the young/hip/urban demographic -- where TMO has historically over-indexed but had recently lost its way. TMO could also aim some of its JUMP marketing at households with teens, who always want the latest and greatest, and would benefit from handset insurance, perhaps enabling the operator to nibble away at family plan share that is dominated by AT&T and Verizon Wireless. The Bigger Picture This program also reflects the growth and legitimacy of the pre-owned/refurbished handset market - until recently the back alley of the wireless business. All of the major operators are growing their refurbished handset programs, and this is also expected to be an important part of Apple's planned retail offensive in the third and fourth quarters. A solid refurbished handset market is an important component of reaching the next wave of smartphone subscribers - those who are more price-sensitive, or additional members of the family who still have feature phones. More options on the equipment side will also start to force subscribers to change their behavior. They'll have to look at total out of pocket costs for both equipment and services, rather than the historic mentality of "almost free handset" made up for by higher connection costs. I also believe T-Mobile's moves are the opening volley in what is going to become a more frothy handset retail market. We are seeing an increased number of options for device procurement and ownership, as operators start chipping away at the subsidy model. Cheaper iPhone and Android devices, fewer subscribers in long-term contracts, a growing refurbished phone market, and a burgeoning variety of service plans and device procurement options will lead to an uptick in switching behavior and buying behavior in the coming months. This reflects the impact of an industry whose competitive index is intensifying. | 
