Why T-Mobile's $650 iPhone Isn't a Good Deal

T-Mobile is the first major carrier to drop subsidies for its phones just ahead of the rumored announcement that it will finally start carrying the iPhone starting this afternoon a move that's not likely to attract many new customers.

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T-Mobile is the first major carrier to stop subsidizing the price of smartphones like the iPhone and will pitch it as a better deal for consumers, but the numbers don't quite add up to a bargain. Apple's list price for an iPhone 5 is $650 but customers at AT&T, Verizon, and Sprint sell them for much less in exchange for two-year service contracts. T-Mobile has vowed to stop padding the prices of all its phones and will charge whatever the device manufacturer charges them. That means the  iPhone 4S will go for $550, and the iPhone 4 is $450. These unsubsidized phones theoretically will attract the thriftiest shoppers, because over-time they can save money by paying less for monthly service after paying more up front for the phone. This goes against the grain of the industry, because after years of subsidizing phones, the carriers have trained people to expect not to shell out a huge sum for a new phone.

Update: T-Mobile has officially announced its iPhone, which will cost $99 up front and then another $20 per month over the next 25 months, which brings the cost of a phone slightly lower than Apple's iPhone list price of $650, at $580. Even so, with two years worth of T-Mobile's contract, it still comes out slightly more expensive than a similar AT&T plan.

But that's not why the T-Mobile unsubsidized phones are not that good a deal. The bigger problem is that T-Mobile is not offering the cheapest 24 months of iPhone service on the market. If you buy a $200 subsidized iPhone 5 at AT&T with a monthly plan for 2GB of data and 450 minutes, the all-in cost over two years is $1,916. If you pay $650 for an iPhone and then get 24 months of T-Mobile service with 2GB of data and unlimited minutes under its newly unveiled rate plans, the total cost runs $2,090. Update: With the $580 price this still comes out to $2,020. So T-Mobile isn't saving you money, it's just changing when you pay them. It's an accounting change more than a value play.

The party with the most to gain from switching to unsubsidized phone pricing is T-Mobile. Carriers that subsidize devices book big initial losses on the sales but then make it up gradually in their subscribers' monthly fees. It's a great deal for Apple, which gets paid full-price and can post huge revenues. But for T-Mobile, which is having financial struggles of its own, having to write a $400 check every time a customer buys an iPhone dampens its profit margins.

That said, the T-Mobile prices would come in a full $510 less than a similar plan on Verizon. But, arguably T-Mobile offers sparser LTE coverag. Ahead of their big event this afternoon T-Mobile LTE service has been detected in just eight cities. Update: T-Mobile has also announced it LTE coverage, which includes 7, not 8, cities. Before that, it had zero cities in which it offered the fast connection. Verizon claims more than 485 LTE-covered markets. Since the principal attraction of the iPhone 5 is its super-fast mobile data, why invest in one on a network that doesn't provide that coverage?

This article is from the archive of our partner The Wire.