T-Mobile exec: Subsidies are hurting wireless industry

Subsidies, which allow the iPhone 4S or Galaxy S II to sell for $200, are actually hurting the industry and artificially devaluing the sophisticated hardware that's out in the market.

That's the read from T-Mobile USA Chief Marketing Officer Cole Brodman, who spoke yesterday at an event hosted by Geekwire. It's a surprising statement because T-Mobile--along with rivals such as AT&T and Verizon Wireless--still relies heavily on subsidies to drive customer growth.

But T-Mobile, more than its rivals, has experimented with no-contract, no-subsidy options, including a monthly payment plan for phones. Currently, the company's prepaid growth is the only thing offsetting the losses it continues to take on the contract end. Brodman said if he were "king for a day," he would abolish subsidies.

"It actually distorts what devices actually cost and it causes (original equipment manufacturers), carriers--everybody to compete on different playing fields," Brodman said.

While smartphones cost $200, $100, or are given away free to consumers, they actually cost the manufacturer much more. The phones are sold at a lower price because the consumer signs a two-year contract, essentially paying for the additional cost--and more--over that period. That's why early-termination fees for smartphones are so high and heavily enforced.

But those subsidies devalue the hardware, leading consumers to dump their products every 18 months or so.

"It is amazing hardware, but it has become kind of throw away," Brodman said.

The subsidy model is a drug the carriers can't seem to wean themselves off from. Consumers are used to lower prices for these pricey phones. This means the carriers need to keep supplying contracts, which provide a steady revenue stream and a virtual guarantee that customers will stick with them for two years.

T-Mobile said it's hard to break the habit because of the competitive dynamics. Consumers still prefer paying a smaller upfront cost and paying the monthly bill, even if it costs more in the end.

Brodman also said he remains confident that T-Mobile can compete against the other carriers without the iPhone. T-Mobile is the only national carrier without the iPhone, a device even regional carrier C-Spire offers. Brodman pointed to the company's lineup of Android, Windows Phone, and BlackBerry devices and said these smartphones do some things better than the iPhone.

Brodman added that it is important for Windows Phone to gain momentum and bring more balance to the industry.