By Gary Cohen (@mrgarycohen), VP Mobile Research, ITG Market Research

16 April 2013: T-Mobile USA (now called T); the “Un-Carrier” has made a bold move by breaking the mould for the way handsets are priced in the US. As 4th out of the top 4 US operators, T needs a novel strategy to differentiate itself from the pack and can’t do it by touting network superiority, the most advanced handsets or lowest service pricing. Instead, they chose to be the first to go down the path of Unsubsidized Handset Pricing.

For those reading this in Europe and most other parts of the world, unsubsidized handsets are nothing new and subsidized handsets may actually seem counter intuitive. You may have traditionally paid near-cost for your handset and can’t imagine why this is in any way novel. However, the major operators in the US and Canada have subsidized phones for a few decades and have trained the market to expect it as the way mobile phones are transacted. It didn’t start that way though.

When I began selling cellular phones in 1986, there were portable phones for $3,000 and installed (into your car) mobile phones for $1,700. After the earliest adopters and the wealthiest citizens got their phones after network launches, the work began to sell mobile as a productivity tool.

There was a clear ROI to be derived from the Airtime cost + Phone cost on a monthly basis and since most people didn’t have a few thousand dollars lying around, we arranged financing of the hardware/phones over a 3 year period. Devices were basically unsubsidized at the time and this was a way to get people past the high cost of entry hurdle. Soon after (1988), we offered subsidized phone pricing if people signed a 1 year contract for service. Since then the contracts have grown to 2 years in the US (3 years in Canada). As a result, @75% of the US user base consists of postpaid users (meaning the operator extends them credit each month for their service).

T is now going back to those roots by offering users transparency in equipment pricing without tying them to a long-term contract. The hope is that users will appreciate the lack of hidden fees for breaking a contract and the freedom to take their handset to any other network they choose. Financing options exist to spread the phone cost over 2 years and reduce the initial equipment cost shock.

The danger to T is that users (both new to T and those upgrading to new devices), won’t do the math and realize that over 2 years, this is a better deal. The other operators have shrugged off this offering as “meaningless” since they all offer Prepaid plans with unsubsidized phones already. What this neglects is that T is offering Postpaid Service Plans as opposed to Prepaid (more expensive Rate Plans) on a Top-tier network. When the economic comparison is done to Verizon, AT&T and Sprint, T has a winning chance.

I think this is a good strategy. It will get attention to an operator that has been struggling to get a recognizable position put forward in the market. In addition, T is about to begin marketing iPhones for the first time (the 4th of 4), and will be the first carrier to offer the Samsung Galaxy S IV in the US. These are bold moves when the unsubsidized cost of those handsets exceeds $600, but success usually goes to the courageous.