AT&T Just Helped Google Sell More Phones

AT&T (NYSE: T  ) is following in the steps of T-Mobile (NYSE: TMUS  ) by offering discounted rates to customers who bring their own phone or buy one without the usual subsidy. This is a growing trend in the wireless industry, and one that Google (NASDAQ: GOOGL  ) may see a benefit from with its low-cost, mid-range Nexus smartphone line.

Avoiding those subsidies
Wireless carriers love smartphone subscribers -- they pay much more than the average feature phone subscriber. What they don't love is paying the high subsidies to phone manufacturers.

With each big phone release, wireless carriers like AT&T take an earnings hit as they pay out millions of subsidies to new phone customers. Of course, subscriber fees eventually make up for the lost profits, but it's quite a bumpy ride for shareholders. The last two years have seen a correlation between iPhone releases and a drop in fourth quarter net income for AT&T.

T Profit Margin (Quarterly) Chart

Source: data by YCharts.

As you can see, AT&T gets punished when it does a good job and sells a bunch of new phones. Selling too many phones with high subsidies can result in an earnings miss, which, regardless of the reason, never looks good.

T-Mobile recognized the business opportunity of no-subsidy, no-contract phones early, and switched its model to focus on the area earlier this year. So far, this plan has resonated with customers, and the company expects to add 1.6 million to 1.8 million net new postpaid customers in 2013 (well above its previous guidance).

With T-Mobile's success, it's easy to see more wireless carriers following its lead. Verizon CEO Lowell McAdam indicated earlier this year that he'd keep an eye on the popularity of T-Mobile's new plan, and implenting a similar no-contract service would be "pretty easy."

Google can capitalize
With a growing shift of carriers separating out full phone costs from monthly phone bills, customers will likely pay more attention to the actual price of a new phone (versus the subsidized price). This may be a boon to less-expensive Android phones, as Android has been dominant in markets with lower phone subsidies (like China).

Google is in a position to facilitate Android phone purchases with its flagship Nexus smartphones and its subsidiary Motorola's new line of Moto phones. The new Nexus 5 is a competitive phone. Priced $300 to $350 less than the iPhone 5s, the Nexus 5 could do very well in a market that emphasizes the full price of a phone.

Motorola has two new phones that could do very well with the no-subsidy model: the Moto X and the Moto G. The Moto X is a high-end phone, which typically retails for $500, and the Moto G is a low-end phone that is priced at just $179.

Motorola announced last week that it would move up the U.S. release date of its Moto G GSM model (which supports AT&T and T-Mobile). Although it's unlikely the move was in conjunction with AT&T's newest offer, it's clear Motorola is targeting the no-subsidy smartphone market with the Moto G.

A matter of control
Google could sit back and reap the benefits of other phone manufacturers using its mobile OS. Those benefits, however, are likely much smaller than if it sells its own phones.

First, Google isn't selling these phones at cost. While the exact bill of materials for the Nexus 5 is unknown, it's likely less than the $199 Apple pays per iPhone 5s. So, Google will make a pretty penny on every Nexus 5 it sells.

More important, however, is that Google is able to exercise complete control over the Android ecosystem. It can funnel Nexus and Moto users into its products and services more easily, which has become a problem for Google as big manufacturers like Samsung and Amazon fork the Android source code to their benefit.

No subsidy, no problem
The move by AT&T will help smooth out its earnings results, and could be a boon to Google's value-priced phones. For customers buying a new phone off-contract, the value propositions of the Nexus 5 or Moto G are quite enticing. I expect stronger sales of the Nexus line of phones, and potentially more Google Play revenue as more carriers follow T-Mobile's lead.

Want to get in on the smartphone phenomenon?
Truth be told, one company sits at the crossroads of smartphone technology as we know it. It's not your typical household name, either. In fact, you've probably never even heard of it! But it stands to reap massive profits NO MATTER WHO ultimately wins the smartphone war. To find out what it is, click here to access The Motley Fool's latest free report: "One Stock You Must Buy Before the iPhone-Android War Escalates Any Further..."


Read/Post Comments (4) | Recommend This Article (0)

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 December 06, 2013, at 2:07 PM, GaryDMN wrote:

    AT&T is US based and Apple has outsold Android smartphones in the USA this year, so wouldn't this help Apple more than Google. Google sells what, 1% of the phones in the USA itself, so how does this help Google more than Apple?

  • Report this Comment On December 06, 2013, at 5:38 PM, adamlevy wrote:

    @GaryDMN The idea is that if customers are incentivized to buy a phone without a subsidy, the price tag matters more. Apple only sells high end phones with prices like $550 or $650. $350 for a phone with similar specs is much more enticing when the typical US customer is used to seeing prices below $200. Look at Android's success in regions where subsidies are less common. There's a direct correlation.

  • Report this Comment On December 06, 2013, at 5:56 PM, sheldonross wrote:

    @Gary

    Could you share where you got your information about Apple outselling Android in the US this year.

    Everything I can find indicates that Android has moved ahead of Apple in the US.

    http://www.tech-thoughts.net/2013/11/smartphone-market-share...

  • Report this Comment On December 08, 2013, at 7:43 PM, hakugaku wrote:

    Nice article. However, I feel it's somewhat misleading.

    After a lengthy online chat with an AT&T representative (chat session available on request), you cannot officially bring a Nexus 5 purchased from the Google Play store and use it off-contract at AT&T. They did say that Customer Care could potentially do something for me in that case, but at least "online", that is not an option.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2755147, ~/Articles/ArticleHandler.aspx, 9/21/2014 2:20:53 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement