T-Mobile's 'No Contract' Option Getting the Attention of Verizon and AT&T

When Benzinga posted this article about T-Mobile announcing plans to get rid of contracts while still making smartphones affordable, the news was seen by many as unimportant.

Everything is big in the cell phone business and when you’re number four behind goliaths like Verizon VZ, AT&T T, and Sprint S, disrupting the market is a tall order.

But there’s evidence that the goliaths are watching closely. Following the announcement, Verizon CEO Lowell McAdam was asked about the T-Mobile plan. He said that developing a program like that would be “pretty easy.”

McAdam went on to say that he was happy to see a new idea put in front of customers and that he would be watching customer reaction to the plan closely. McAdam said, "We can react quickly to consumers' shifting needs.”

The T-Mobile plan is contract free, but for those who can’t pay the full price of the phone, an extra $20 is added to their monthly bill. They’re contractually obligated to pay the $20 for two years.

AT&T CEO Randall Stephenson said that the company is exploring the idea of handset financing where the customer would pay the cost of the phone over a few months. After that, they would be free to cancel service at any time.

The three larger carriers already offer a no contract option but customers have to pay the retail price for the phone upfront. This is not a program that companies promote as aggressively as they do contract-based offerings.

To the surprise of customers, cell phone companies may be willing to embrace the no contract model because contracts are a lose-lose. Not only is there a growing distaste towards cell phone contracts in the eyes of the end user, but by subsidizing the phone, the company is taking an earnings hit.

Apple’s AAPL iPhone is believed to have a substantial impact on a carrier’s earnings especially during quarters when a new phone is brought to market.

So far, the T-Mobile plan hasn’t seen the outsized customer response that the company had hoped. There could be a few reasons for that. First, for those who might be interested in jumping ship and heading to T-Mobile, those customers will have to wait for their contracts to run out or pay the early termination fee. This may be why Verizon will watch closely and “quickly react.”

For those that do the math, it isn’t the $1,000 savings that T-Mobile has said when it’s compared to what most customers would get at AT&T, the savings is still an impressive $580 but some industry watchers say that not even $580 is enough to pull customers from a carrier they trust (although may not like) to one they hardly know.