The Apple Threat You're Not Watching

Telefonica's (NYSE: TEF  ) third-quarter earnings point to a potentially troubling trend for Apple (Nasdaq: AAPL  ) . The Spanish telecom claims its decision to remove handset subsidies for new customers in Spain last March helped the carrier post an 80% quarterly increase in operating income before depreciation and amortization compared to the same period last year.

To spell it out for Cupertinistas, no mas smartphone subsidies means the priciest handsets are no longer affordable for the less-than-well-off in Spain. The 16 GB iPhone 5 retails for $870 there when bought without a long-term contract.

Note the huge drop in iPhone sales for Spain:

Though ditching subsidies has lifted profit margins for Telefonica, it has also meant losing subscribers -- 254,000 in September. However, the carrier is continuing with its no-subsidy policy.

Vodafone's (Nasdaq: VOD  ) Spanish mobile operation also decided to forego subsidies, but after losing 178,000 customers in September, unlike Telefonica, it's going back to subsidizing handsets.

Advantage, Samsung
What Samsung has that Apple doesn't when it comes to selling its smartphones in economically hard-hit areas is a hierarchy of smartphone models. Apple can't compete with Samsung in the lower price ranges because it has no low-priced handsets. Other than older used iPhones sold on Craigslist or Ebay, cheaper iPhones are just not available.

The latest Gartner report has the Android's third-quarter market share at 72.4%, an increase of over 20 percentage points over the same quarter last year.

Apple's iOS third quarter market share is 13.9%, a decrease from 15% in the same quarter last year.

If the grand experiment in making customers pay full price for handsets works out for Telefonica, it could turn out to be the canary in a coalmine for Apple's pricing of the iPhone. Mobile operators around the world are looking for ways to cut their costs, and getting rid of phone subsidies is certainly an attractive option.

There is absolutely no argument that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more importantly, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 20, 2012, at 6:45 PM, JaanS wrote:

    With all due respect, you say:

    "What Samsung has that Apple doesn't when it comes to selling its smartphones in economically hard-hit areas is a hierarchy of smartphone models. Apple can't compete with Samsung in the lower price ranges because it has no low-priced handsets. Other than older used iPhones sold on Craigslist or Ebay, cheaper iPhones are just not available."

    Are you unaware that Apple sells the iPhone 4s for $100 and the 4 for $0 - although they are both subsidized. This would certainly qualify as a cheaper hierarchy. What do the cheaper Samsung smartphones sell for UNsubsidized? At what point does a phone become smart enough to be a smartphone?

    Samsung will be losing its subsidy as well in the given situation. We will see where telefonica is left when its customers abandon it.

  • Report this Comment On November 20, 2012, at 7:03 PM, bbrriilliiaanntt wrote:

    ARPU, this 4 letter acronym is why Apple will never have to worry about subsidy reduction. The ARPU is significantly higher for iPhone then for any other handset. Enough to significantly overcome the wireless carriers subsidy cost over a 2-year contract. Simple economics, which very few analyst understand. Hope this helps…Cheers!

  • Report this Comment On November 20, 2012, at 7:08 PM, H3D wrote:

    In the EU we have regulator unbundled telecom,

    Apple can start their own retail operations in Spain, buying carrier services wholesale and subsidising the handset themselves. And own the customer contract, moving it to the cheapest network day to day.

    Lets see how the carriers like that.!

  • Report this Comment On November 20, 2012, at 7:19 PM, bbrriilliiaanntt wrote:

    @HD3 That would be classic Apple: control the vertical, delight the consumer, revolutionize an entire industry. Good call...

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