Apple Just Broke T-Mobile's Heart

T-Mobile USA (NYSE: TMUS  ) had such high expectations for the upcoming launch of a "low-cost" iPhone. On Tuesday, Apple (NASDAQ: AAPL  ) held its long-awaited iPhone launch event, and in the process, dashed all of T-Mobile's hopes.

It's been common knowledge for weeks that Apple was going to launch two new iPhones this month. The iPhone 5S succeeds the iPhone 5 at the high end of Apple's lineup. The second phone -- the iPhone 5C -- is a cheaper model intended for more price-sensitive customers.

The iPhone 5S is Apple's new high-end phone (photo: Apple).

That sounded like great news for T-Mobile. Its new "un-carrier" strategy is designed to appeal especially to price-sensitive individuals. There's just one problem: The "cheaper" iPhone isn't cheap at all! In fact, it will be more expensive than Apple's entry-level phone today, carrying a hefty $549 price tag. In other words, there's no way the iPhone 5C will become the secret weapon T-Mobile was hoping for.

Winning the price-sensitive consumer
As part of its new "un-carrier" strategy, T-Mobile has moved to differentiate itself from rivals such as AT&T (NYSE: T  ) and Verizon (NYSE: VZ  ) by doing away with official subsidies for smartphone buyers. This approach allows T-Mobile to offer significantly lower prices for smartphone service, starting at $50 a month for unlimited voice, text, and data. (However, that plan allows only 500MB of data at 4G speeds; for access to more high-speed data, users must pay $10 to $20 extra.)

The trade-off is that T-Mobile subscribers don't get "free" -- or steeply discounted -- phones. For several years, Apple has priced its top-of-the-line smartphones at $649 with 16 GB of memory. T-Mobile customers can either pay that much upfront or opt to finance it over 24 months, with a lower down payment.

T-Mobile's plans are a great deal for a person who already has a GSM phone to use, like many current AT&T customers. T-Mobile's plans also benefit people who don't plan to upgrade every two years. Lastly, they're advantageous for users who want a cheaper smartphone and therefore wouldn't benefit as much from a traditional subsidy.

Hopes dashed
Many analysts expected that T-Mobile would gain a significant competitive advantage from the release of Apple's iPhone 5C. Not only would this be the first time that T-Mobile launched an iPhone at the same time as its competitors, but a cheaper iPhone would also appeal more to T-Mobile's target customer.

The iPhone 5C (photo: Apple).

A fully functional iPhone priced at $349 (unsubsidized) would be fairly close in price to the $199 upfront cost of a subsidized iPhone 5. In return for the slightly higher upfront cost, T-Mobile customers would have access to much cheaper no-contract plans.

Instead, the no-contract pricing for the iPhone 5C is $549, making traditional carrier subsidies much more desirable. T-Mobile will undoubtedly lure in some new customers nonetheless. However, the higher monthly payments associated with a $549 phone (an extra $8.33 per month compared with a $349 phone) will make for a much smaller pricing gap with AT&T and Verizon.

Uphill battle
Getting access to the iPhone has been a big tailwind for T-Mobile this year. A cheaper iPhone would have been an even bigger catalyst for T-Mobile, allowing it to further distance itself from industry leaders Verizon and AT&T in terms of pricing. But Apple rained on T-Mobile's parade by setting the iPhone 5C price high, at $549. Now, T-Mobile will have to continue slogging along to regain market share in the ultra-competitive wireless business.

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Read/Post Comments (12) | Recommend This Article (6)

Comments from our Foolish Readers

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 September 12, 2013, at 9:35 AM, gwtx2 wrote:

    Most smartphones are overpriced anyway. The market drives this. I can buy a 55" LCD TV cheaper than I can a smartphone.

  • Report this Comment On September 12, 2013, at 9:40 AM, webguy76 wrote:

    Apple didn't break T-Mobiles heart, idiot "analysts" like you did! Apple never EVER said ANYTHING about a low cost or budget phone. The media picked it up some time ago and ran with it. Along with that came all of the high expectations for huge sales in third world countries and everyone in CHina was now going to own an iPhone5C and Samsung and Microsoft and HTC and Nokia would all beg for mercy. Apple didn't f%ck it up, YOU DID! It's poor reporting from the media, over-hype and 24-7 reporting sensationalizing every little stupid nuance of the phone or what you think its gonna have, and pro-Apple websites like the Motley Fool that screwed this thing up! You have such a blind loyalty for Apple and such hatred for Samsung and Microsoft that it distracts you from actually reporting anything non-biased. Why don't you try some real reporting for a change. You know, with solid facts and hard-core data?!?

  • Report this Comment On September 12, 2013, at 11:05 AM, TMFGemHunter wrote:

    @webguy: Fair enough, but Apple also said it would never make a 7" tablet. Not too long after that, it made a 7.9" one. Part of my job is trying to understand what's going to happen and what it means for companies' future financial performance, not just report "facts and hard-core data". That inevitably involves some predictions that turn out to be wrong.

    I think the decision to not release a budget iPhone was a good move for Apple. I never said it was a mistake. (Apple does need to find a better way to address the midrange market, though; the answer may be used iPhones that it's buying back from customers who upgrade.)

    However, the $549 price point is not good for T-Mobile, which would have been the biggest beneficiary of a $300-$400 iPhone.

    Adam

  • Report this Comment On September 12, 2013, at 11:15 AM, gskorich wrote:

    I get that people think the iPhone 5C is over priced at the unlocked rate of 549.00 but what is the price they were looking for where apple can afford to make a quality device and still make a profit? apple doesn't skimp when it comes to devices so where is this magic manufacturing cost reduction coming from?

  • Report this Comment On September 12, 2013, at 11:55 AM, spinod wrote:

    You know who broke their hearts? Other phone companies ripping everyone off. These phones shouldn't cost more than 200-300 dollars AT MOST, yet they are priced so high so these phone companies can sucker you into a contract and buy the phone at actual market value. You are saying a company will knock off 300-400 dollars just because you sign a contract? No, the phone only costs maybe 50 bucks to make, thats why.

    Need proof? Why do tablets with better specs and more resources only cost 300-400 dollars AT MOST? Why are laptops with miles better technology only 800? These phone companies are a rip off.

    Proof of it is when both AT T and Verizon EXTENDED the term of when you can get a phone. It went to a full two years, why? According to them "it costs too much" to let it be less. Yet Tmobile comes along, says "sure go ahead, upgrade any time" and people start switching, what does AT T and Verizon do in a heartbeat? "Oh uhh, you can do it in 6 months now!!! Please come back!!!" Its no doubt they felt weak at that moment, take away their power and they actually conform to their customers. Otherwise they just rip you off.

    Also in regards to the article, Tmobile currently doesn't require a down payment for financing.

  • Report this Comment On September 12, 2013, at 12:28 PM, webguy76 wrote:

    @Adam, let me first say thanks for responding. I have commented on dozens and dozens of Motley Fool articles and you are the first author to respond. Let me also say that by "you" I mean the media in general, not you personally. I know there are ups and downs, wins and fails, and the market is hard to figure out. I'm sure you are doing a great job, I'll make sure to read your upcoming articles. Shalom

  • Report this Comment On September 12, 2013, at 1:09 PM, Dubloseven wrote:

    The average cost to make an iPhone is between $100-$150. With the new plastic casing I'd put the 5C around $80 to manufacture.

    T-Mobile is a genius at false advertising. When they claim a price there is no truth to it at all. Their upfront phone prices and monthly installment rates are dictated purely on credit score. Most consumers turn to T-Mobile when they fall into financial despair. Bankruptcy, foreign visitor with no established credit, cell service shut off on other carrier due to high bill, etc...

    So where a good credit customer pays $0-$200 upfront and the rest gets financed, a poor credit customer can pay as high as $500 per phone to walk out the door. The average customer falls into T-Mobile's subprime credit score of credit class D. But it doesn't end there...

    On order to pay whatever price you qualify for, you must usually sign up for more DATA or other features than you want or need in order to meet their stipulations. Both for in store price and whatever mail in rebate that pops up after they quote the initial price. But wait....

    Good credit customers get rebate money back within 2 months on average. While poor credit customers must wait 12 months or longer and ONLY if they've never made a late monthly payment. Which when taking into account all of the customers with low incomes. Therefor naturally high tendency to pay late: then you will never see your rebate(s) and will have payed more for nothing.

    T-Mobile would prefer you not know any of this and blindly waltz into their store expecting to save save save, when in fact most customers end up paying nearly as much as on other company's plans while receiving inferior upfront pricing and cell service.

    Everything I said here is fact as having worked for them for years, and although there is much more red tape to savings, I think my point has been made.

  • Report this Comment On September 12, 2013, at 3:52 PM, boldog03 wrote:

    Doubleo first I don't know where you got your info, but its crazy I have a iPhone 5 that I payed $99 down and 20 per month for 24 months my total bill with unlimited is $79 per month with AT&T I was paying $125 with only 4 gigs of data and 800 mins of talk. Tmoble is just the better deal you might get an upfront deal , but difference in price and early termination fee shows AT&T and version charge almost double.

  • Report this Comment On September 12, 2013, at 6:03 PM, williamfrantz wrote:

    Only Google sells powerful smartphones at realistic prices. The excellent Nexus 4 is just $199. Seems crazy to buy any other phone if you have a pay-as-you-go plan. Even Motorola which is now owned by Google, priced the new Moto X at $650. Why charge $400 more for a phone with very similar hardware specs?

    You might think the unsubsidized price doesn't matter if you are signing a contract anyway, but don't forget that you still pay sales tax on the full $650 "cost" of the phone.

  • Report this Comment On September 12, 2013, at 6:24 PM, jeffhre wrote:

    spinod,

    So making a compact, well functioning, latest tech, low power, reasonably cool to the touch device is cheaper, when it is made much smaller?

  • Report this Comment On September 12, 2013, at 6:34 PM, sheldonross wrote:

    I agree with williamfrantz, TMobile should form a partnership with Google and become the premier retailer of "Nexus" phones. Verizon did very well with their original "Droid" partnership with Motorola, and I think TMobile could do well to emulate them to a degree.

    $200-300 bucks for a premium Google Nexus phone and no contract.

  • Report this Comment On September 13, 2013, at 2:01 PM, TMFGemHunter wrote:

    I agree that T-Mobile/Google could be a natural partnership. Google is happy to price phones (and tablets) at cost just to get more people using its services. That's a natural fit with T-Mobile's business model.

    BTW, iPhones are not that cheap to manufacture. The best estimates I have seen put the total cost, including manufacturing, insurance, shipping, etc. at almost $300 for the iPhone 5/iPhone 5S. The 5C is a tad cheaper, but still around $250. Apple is still making plenty of profit, but it would not make sense to sell these phones for $300.

    Adam

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