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T-Mobile Stops Subsidizing Apple

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Equally important as the hubbub over T-Mobile finally getting its hands on Apple's (NASDAQ: AAPL  ) iPhone was the announcement over the weekend it was finally ending the subsidies it pays on smartphones. Instead users will pay full freight for a handset, but will have the option of paying it off in installments or bringing their own device if they choose. 

Wireless carriers have traditionally subsidized the cost of a new smartphone in exchange for locking in consumers to a two-year contract. And while the greater penetration has helped increase the average revenue per user for carriers as well as greater mobile data revenue, margins end up being compressed because of the subsidy's costs. 

AT&T (NYSE: T  ) said postpaid wireless subscriber ARPU grew 1.9% to $64.98 while its cost of sales grew 4.1%. Verizon (NYSE: VZ  ) reported fourth-quarter average revenue per account -- a slightly different way of calculating the number, since multiple devices can share data -- jumped 6.6% to $146.80 while its cost of sales were up over 8%. 

Since it's largely going it alone at the moment, T-Mobile is taking a risk that consumers will calculate the no-contract, unsubsidized program is better for them in the long run. But I don't think they'll do the math. They'll compare their upfront costs -- $650 for a new no-contract iPhone versus a tethered $199 subsidized handset -- and they'll choose the latter because they'll be laying out less cash.

Now the Fool's Evan Niu suggests T-Mobile is still sending a few bills Cupertino's way with its payment plan, which, if consumers choose that option, could make it the more attractive plan among the major carriers. But with iPhone 4 units still being given away for free and 4S models going for $99 with two-year contracts at retailers like Best Buy, paying for the phones -- even if they're slightly subsidized -- still might not be so attractive.

But a larger question might be on carriers' minds: Why should they subsidize cash-rich Apple at all, which reportedly sits on $40 billion in cash and short-term investments (or nearly $140 billion, if you include long-term investments), when they're taking a hit to their margins?

That's why over the short haul I think T-Mobile will take a hit for blazing this trail, but over time I see Verizon and Ma Bell coming around to its way of thinking. Eventually, highly subsidized smartphones will be a thing of the past.

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Read/Post Comments (3) | Recommend This Article (2)

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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 March 27, 2013, at 6:49 PM, JesusQuintanaJr wrote:

    T-Mobile is still subsidizing the iPhone. The only difference between their model and their competitors is that they will stop charging a fee when the phone is paid of after two years.

    Leap tried the unsubsidized model and that has not worked out very well for them.

  • Report this Comment On March 27, 2013, at 6:53 PM, bansisharma wrote:

    Why do I read so many articles talking about carriers subsidizing Apple? Let us get the fundamentals straight. Carriers subsidize their own customers, not Apple. And they hardly subsidize for that matter. They just hide the cost in their monthly plan charges. If they don't "subsidize", they will have to pass on the cost of the handset to their customers up front a la T-Mobile. They cannot do that and keep their high monthly plan charges also. They will have to drop the monthly plan charges in that case, again a la T-Mobile. What is more optimal for any given telecom carrier is a calculation the carrier has to perform based on their own business model and market research and what is optimal for one carrier may not work so well for another. It is highly misleading and inaccurate to say that carriers subsidize Apple at the cost of their own margins as if the carriers' margins can be made to magically improve by passing more of the handset cost to their customers up front and lowering their monthly plan charges. And if they could simply drive a harder bargain and negotiate down the price of the handset with Apple, they would have to be pretty dumb not to do it right now (why wait to come around to T-Mobile's way of thinking as you state they will do over time). And what on earth does any of this have to do with the size of Apple's cash holding? Envy is not a business strategy. Either carriers have the leverage to negotiate down price from Apple or they don't, regardless of the shape and size of Apple's balance sheet. If you believe carriers don't have the requisite leverage now but will have more leverage over time, explaining why you believe that would be helpful.

  • Report this Comment On March 27, 2013, at 8:53 PM, tmlima wrote:

    I used to be on T-Mobile and switched to ATT. The problem with T-Mobile was the service was really bad, downloads were real bad. But the real problem is their billing practices. 1 example is they would change the due date and than charge a late fee. I had the bill automatically go out of my checking every month on the same day. Than suddenly I would get hit with a late payment. Screw me once, shame on you. But screw me twice and that is it!

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