How T-Mobile Increases Competition Without Lowering Your Phone Bill

When they say everything that goes up must come down, they’re not talking about your cell phone bill. The U.S. wireless industry is more competitive than it has been in quite some time, making it harder—but not impossible—for phone companies to charge ever-increasing amounts for wireless service.

The amount of money wireless companies make from each subscriber did drop last quarter. It was the first year-over-year decline in at least three years, according to an analysis of company filings by New Street Research.

This sort of thing concerns people who run phone companies, but it doesn’t mean their customers are saving money. The shift is really in the way people pay for their phone service, not how much they pay. Instead of getting a cheap phone in exchange for a two-year contract, people are paying the full price of their phones and avoiding a commitment.

T-Mobile loves this model and has pushed its competitors in this direction. Wireless companies end up making less each month from service fees and compensate with the money from selling phones on installment plans. Here’s a chart that incorporates these sales into their revenue.

When you look at it this way, the phone companies are still increasing the amount of money they make from each customer, although the rate of increases is slowing. These are averages, so you might be able to work out a better deal for yourself, but overall the price of wireless service is increasing. “It’s more an optical change than actual revenue and cash flows,” says Vivek Stalam of New Street.

Phone bills are actually going up even faster than the rate of increase shown here. An increasing proportion of wireless subscriptions are for tablets, which are significantly cheaper than phone plans. About 8 percent of postpaid accounts are currently for tablets, and new tablet subscribers make up much of the subscriber growth in the industry.

T-Mobile, which isn’t turning a profit, gets a little touchy about it. Its executives say to investors over and over that it’s not lowering costs as a way to poach customers. Instead, the company argues that the industry has done so much to alienate people over the years that there are plenty of ways other than pricing to undermine your rivals. People just hate phone companies and they want something new, as J. Braxton Carter, T-Mobile’s chief financial officer, explained on a conference call on Thursday. “It’s not just an old game of people sitting looking for what’s the cheapest by two cents,” he said.

And yet the phone industry is still concerned about the way T-Mobile is looking at its golden goose. Everything T-Mobile is doing right now seems to be working. The company added 1.2 million postpaid phone customers last quarter, while the other three national carriers lost a combined 801,000, according to industry analyst Craig Moffett.

In a research note, Moffett noted a growing sentiment that T-Mobile’s success will end up hurting everyone else by forcing them to do silly things in response. “We do not expect a full-scale price war. Repricing would simply be too costly for Verizon or AT&T,” he wrote on Friday. “Instead, they will cut prices on the margin; that is, to new customers or those who are potentially leaving.” Companies are competing with tactics such as more generous data plans or group plans. If T-Mobile forces its competitors into making it easier for people to move between providers, then the pressure on them to come up with such goodies grows.

For now, all of this is giving Americans better options for wireless service than they have had in the recent past. They’re just not necessarily cheaper ones.

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