T-Mobile USA said on Thursday it planned to stop subsidizing smartphones, the first major U.S. carrier to do so, in a move it hopes will cut costs and woo customers frustrated with restrictions on upgrades in longer-term contracts.
T-Mobile USA also announced an agreement to sell the iPhone, becoming the last big carrier to sign on with Apple Inc, which will also help it win new customers and keep existing subscribers.
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U.S. operators typically pay phone subsidies, giving subscribers discounts in exchange for tying them into a two-year contract. While this helps retain customers, it also ramps up costs, particularly for the higher-priced iPhone.
The No. 4 mobile service provider, which has been struggling with customer losses, already gives customers the option to pay less for their phone service if they forego a smartphone subsidy.
Next year, T-Mobile USA plans do away with subsidies entirely, Chief Executive John Legere said in parent company Deutsche Telekom's investor meeting, which was webcast.
The move will cut T-Mobile USA's upfront costs but Legere also expects it to appeal to customers, who dislike restrictions on how often they can upgrade their phones under the subsidy model favored by bigger rivals Verizon Wireless Inc, AT&T Inc and Sprint Nextel Corp.
"We think there is huge room for a challenger to change some of that, in a way that the larger players will not be able to or will choose not to respond to," the executive said.
Under the unsubsidized model, Legere said customers will be able to upgrade their phones when they want to by trading in the device. T-Mobile USA's bigger rivals have been restricting upgrades to keep their subsidy costs under control.
He did not say when exactly in 2013 the company plans to switch entirely away from subsidizing phones. Around 80 percent of the company's new phone activations are currently from subscribers who have decided not to pay a subsidy for their device.
While T-Mobile USA has long wanted to sell the iPhone, which first went on sale at AT&T in 2007, the phone's high price appeared to stop it from reaching a deal with Apple.
Legere said that T-Mobile USA worked hard to come to a deal with Apple and promised that the Apple experience would be "dramatically different" compared to other operators.
He said T-Mobile USA did not have to make the same kind of commitment Sprint made to order a certain number of iPhones, but did not give further details about his company's deal with Apple.
Sprint agreed to pay Apple a minimum of $15.5 billion over four years for selling the iPhone.
Legere did not say when T-Mobile USA would start selling Apple products but said it would be months before he could give more details.
T-Mobile USA has agreed to merge with smaller rival MetroPCS Communications Inc next year.
(Editing by Edwina Gibbs)