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Buy Into T MOBILE US INC (TMUS)’s Jump?

For a carrier focusing so heavily on transparency and communication with consumers, T MOBILE US INC (NYSE:TMUS)‘s freshly unveiled Jump program is a bit confusing. On the surface, it sounds great: two smartphone upgrades every year instead of one smartphone upgrade every two years.

The devil is in the details. Should you buy into Jump?

T MOBILE US INC (NYSE:TMUS)

How it works
To sign up for the program, subscribers will pay $10 per month. Included in the service is a comprehensive handset protection program (i.e., insurance) that covers things such as malfunction, damage, loss, and theft. The real kicker is the upgrade frequency that’s included.

T MOBILE US INC (NYSE:TMUS) says the fee is only $2 more than what most people pay for handset protection alone. For reference, AT&T Inc. (NYSE:T) and Verizon Communications Inc. (NYSE:VZ) Wireless both charge $7 for their protection programs, and Sprint Nextel Corporation (NYSE:S) prices at $8. All four carriers outsource the insurance underwriting to Asurion.

Six months after initial enrollment, customers can upgrade their smartphone twice every 12 months. To do so, customers just trade in their device and any remaining finance payments owed on the older device are eliminated, and they then purchase a new device for the listed upfront pricing with the associated financing plans. Devices that are traded in need to be in “good working condition,” and there is a $20 to $170 deductible if there’s any damage. There’s no mention of receiving any residual value back.

But at what cost?
Let’s look at it from a T MOBILE US INC (NYSE:TMUS) customer’s perspective. Any smartphone user who’s interested in upgrading this frequently faces two alternatives, with the first being Jump. The second choice is to simply buy smartphones at full retail and sell them to another user in six months after depreciation. I’ll exclude service costs for this comparison.

To start, let’s say you bought a flagship smartphone such as Apple Inc. (NASDAQ:AAPL)‘s iPhone 5, which costs $146 upfront in addition to monthly payments of $21. You’ll pay $60 in Jump fees before the first upgrade eligibility. For the first six months, that’s $332 in total costs before making the jump to a new device.

Alternatively, you could purchase the same entry-level iPhone 5 for $650 and simply sell it after six months if you wanted to upgrade. Priceonomics did a study last year on smartphone resale value and found that on average, smartphones lose 25% of their value in the first six months (iPhones tend to hold their value better than other devices.) That suggests you could sell a 6-month-old iPhone 5 for $488 and lose only $163 in depreciation. Recent completed listings on eBay Inc (NASDAQ:EBAY) back up this theory, as does a Piper Jaffray study on smartphone resale values. That’s half of what you lose in the Jump scenario.

The figures for other flagships such as Samsung’s Galaxy S4 or HTC’s One are similar (both have the same pricing). Under Jump, the first six months cost $280, while depreciation on the $580 retail price would be close to $145 — again, roughly half as much.

Of course, with Jump you also get the insurance bundled in, but that still doesn’t fully explain the cost difference. You could purchase standalone handset protection from T MOBILE US INC (NYSE:TMUS) for $8 per month, or $48 for six months. There’s also the added convenience of an easy trade-in instead of having to sell your device on eBay Inc (NASDAQ:EBAY) or Craigslist, but how much is that convenience worth?

Look before you jump
As it stands, Jump isn’t all that great of a deal. Customers who are interested in semiannual upgrades are better off just reselling their phones when they want to upgrade. You don’t even have to necessarily pay full price upfront, since T MOBILE US INC (NYSE:TMUS) still offers financing plans; you’d just sell your device and pay off the balance when you’re ready to make the switch.

Jump’s incremental $2 per month over standalone insurance sounds enticing, but it appears that the carrier may profit on the trade-in once it turns around and resells the used device, since it’s not giving back any residual value.

Don’t make the Jump.

The article Should You Buy Into T-Mobile’s Jump? originally appeared on Fool.com is written by Evan Niu, CFA.

Fool contributor Evan Niu, CFA, owns shares of Apple and Verizon Communications. The Motley Fool recommends and owns shares of Apple.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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