T-Mobile subsidy cut will be a "disaster," Telefonica exec says

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As the smallest nationwide operator in the U.S. and the last to get the iPhone, T-Mobile needs to make some bold changes. But eliminating phone subsidies, like it said it plans to do, will only make matters worse for the operator.

Take it from someone with experience. "It was a disaster," said Tracy Isacke, director of Telefonica Digital.

Earlier this year Telefonica and Vodafone both decided to get rid of subsidies in Spain. The customer hemorrhaging hasn't stopped. In September alone, Telefonica lost 253,520 mobile users. Vodafone has similarly been losing customers and in July brought back subsidies for what it said was a limited time.

If all operators in a market were to get rid of subsidies, the shift could work, said Omar Javaid, managing director of BBO Global and until a couple months ago a Motorola Mobility executive. But when one operator like T-Mobile makes such a dramatic change, it's an invitation for the competitors to actually increase their subsidies to try to win more customers. "If someone wants to drop subsidies, that's an opportunity [for the competition] to go for the jugular," he said.

In Spain, Orange, which retained subsidies, has been happily gaining market share at the expense of Telefonica and Vodafone.

Not only is T-Mobile likely to lose customers, it may only attract those with outdated phones, furthering its reputation as the low-cost operator.

As part of the plan, T-Mobile will require people to buy phones outright or bring their own phones and in exchange their monthly bill will be lower than the competition. Over the course of two years, customers come out ahead even if they buy a new phone at the start, compared to going with one of the other operators that still use subsidies.

But it's going to be tough for T-Mobile to convince people to shell out hundreds of dollars for a phone – $650 for the cheapest iPhone 5 – when the same phones are going for $200 or less elsewhere.

Since the monthly plans are less expensive than the competition, some people may wait until their contracts are up at AT&T and then take their two-year-old phone to T-Mobile. That would make T-Mobile the operator serving customers with outdated phones. It already has a reputation as the operator that is behind the rest (it's the last to get the iPhone and has been slow to upgrade its network) and this won't help.

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