Will AT&T's New Plan Crush Apple's iPhone Business?

Perhaps fearing the rapid, recent growth of T-Mobile (NYSE: TMUS  ) , AT&T (NYSE: T  ) has unveiled a new plan that could lead to the carrier selling fewer of Apple's (NASDAQ: AAPL  ) iPhones. Starting next week, AT&T subscribers will have the option of signing up for the "Mobile Share Value Plan" -- a plan that would separate the cost of their smartphone from the cost of their service. Subscribers who pay for their phone up front, activate an old phone they already own, or pay for their phone in monthly installments, will receive a discount on their monthly bill.

Among subscribers that opt for this plan, cheaper handsets powered by Google's (NASDAQ: GOOGL  ) Android could become far more attractive. AT&T subscribers who switch might be enticed to pick up a less expensive Android phone rather than a more expensive iPhone.

T-Mobile gets fewer iPhone activations than the other carriers
Last quarter, T-Mobile sold (as a percentage of total smartphone sales) far fewer of Apple's iPhones than the other major carriers. In total, just 21% of the smartphones T-Mobile sold were iPhones, while more than 50% of Verizon's smartphone sales were Apple-made handsets. Unfortunately, AT&T has stopped disclosing iPhone sales data, but historically, about 80% of the carrier's smartphone sales have come from Apple's iPhones, and though that percentage may have declined somewhat, it's still more than likely far higher than T-Mobile's.

There's a variety of reasons to explain the discrepancy between T-Mobile and the other carriers. For starters, T-Mobile only got Apple's iPhone this year -- its longtime subscribers may have been locked into Google's competing Android ecosystem, while its employees may have been more comfortable selling devices powered by Google's mobile operating system.

But a larger factor may be T-Mobile's new pricing policies. Starting this year, T-Mobile opted to do away with phone subsidies entirely, forcing subscribers to buy their handsets up front, or pay for them in monthly installments. This has the obvious effect of making cheaper handsets more enticing, as monthly costs can vary significantly based on the actual price of the phone. T-Mobile subscribers opting for Apple's iPhone 5s, for example, must pay $25 per month for 24 months, in addition to a $50 down payment. In contrast, the Android-powered LG Optimus F6 can be had for just $12 per month with no down payment.

Now, consider the alternative: a standard, two-year contract with AT&T. No matter which phone a subscriber chooses, their monthly bill will be the same -- the only thing that varies is the up-front cost. Picking a cheap handset powered by Google's Android might save an AT&T subscriber a couple hundred dollars up front, but it's hardly worth it -- they're stuck with the phone for two years anyway, so most of them logically choose the higher-quality Apple-made device.

Apple's iPhone business is dependent on subsidies
But that wouldn't be the case if AT&T wasn't subsidizing Apple's iPhone: It's overwhelming clear that Apple depends on carrier subsidies for its iPhone sales. In emerging markets, where most carriers don't subsidize phones, Google's Android dominates. Where phone subsidies are relatively generous (like in the U.S. or Japan), Apple accounts for a large portion of the market.

That's why this trend toward reduced carrier subsidies should be worrying for Apple. Despite T-Mobile's recent growth, it remains one of the nation's smallest carriers -- but AT&T is the second largest. AT&T isn't abolishing subsidies entirely, but its new plan gives subscribers the option of forgoing subsidies in favor of reduced monthly bills.

If many of AT&T's subscribers take the company up on the offer, or if the trend away from smartphone subsidies continues, Apple's iPhone business could come under pressure in the coming quarters.

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Read/Post Comments (29) | Recommend This Article (12)

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 07, 2013, at 3:20 PM, jafutral wrote:

    That would be an interesting turn since it was ATT who wanted Apple to go with subsidized handsets to begin with. Up until then, Apple was content to sell for full price.

    Joe

  • Report this Comment On December 07, 2013, at 4:24 PM, Tkdblk45 wrote:

    Yes, my iPhone 4 did cost me $200 up front, but at the end of the contract, I sold it to a reseller for $150, so my new iPhone 5 cost me $50 up front.

    So........not likely I will change for a plastic Android.

  • Report this Comment On December 07, 2013, at 9:55 PM, loblolly7 wrote:

    Sam:

    Every time, I see an article that is penned by you, I know it will be negative for Apple. I do not mind negative articles, but when every single article about Apple you produce is negative, you loose some objectivity and become irrelevant.

    Don't know what Apple did to you, but you seem to go out of your way to be critical.

  • Report this Comment On December 08, 2013, at 4:23 AM, TechnoHistorian wrote:

    Now let's see, AT&T subsidizes Apple -- not in my experience! I pay AT&T about $100 a month to use their service for my iPhone. A fraction of that goes to subsidize the phone, the rest is billions of dollars in business that Apple brings to AT&T!

  • Report this Comment On December 08, 2013, at 5:25 AM, BradApple wrote:

    "Will AT&T's New Plan Crush Apple's iPhone Business?" Methinks not. The author of this article does not present a compelling argument to support his thesis. He fails to point out out that T-Mobile recently launched the JUMP upgrade program that enables users to upgrade their phone twice every 12 months. JUMP is likely to be very popular with current and prospective iPhone users. The fact that the iPhone was "just" 21% of T-Mobile's business last quarter is actually a testament to Apple's overall strength when you consider the fact that T-Mobile didn't even offer the iPhone until quite recently.

  • Report this Comment On December 08, 2013, at 6:47 AM, gsagi wrote:

    another click-bait Betteridge-Mattera piece

  • Report this Comment On December 08, 2013, at 6:53 AM, gsagi wrote:

    Why would AT&T try to "crush" its own business? Android phones are used much less to access the Intermet (data from independent analytics sources) and as the main income of carriers comes from selling data to customers AT&T would be trying to encourage the sale of phones that generate less income? Maybe you should change the title: Will AT&T's new plan crush its own business? But that would not generate traffic...

    Shameless.

  • Report this Comment On December 08, 2013, at 7:07 AM, vernr75 wrote:

    Apple's iPhone market share comes mostly from the few places where the iPhone is a $0-$200 phone from the perspective of consumers, thanks to those hefty $450 subsidies. Since the US carriers were charging everyone high data fees regardless of the phone they purchased and essentially forcing everyone to finance their subsidy bill, Apple benefited greatly because an iPhone was as expensive to maintain as any Android at any price tag. However, this trend toward separating the cost of the phone from the cost of data is going to hurt Apple at its core (pun intended). That's cost separation trend has been happening in Europe as handset priced fell on the lower end, and Apple's market share is now dropping there as those markets approach saturation. About 60% of the US mobile phone market are now using smartphones, so the US market is approaching saturation as well. The remaining 40% are folks who don't want to spend large sums on phones or data. That's why they're on feature phones.

    If more carriers start marketing these clear lower cost options that expose the high cost of higher end phones in the monthly bill, we may see most of the folks who are still on the fence about smartphones eventually gravitate toward lower cost Android devices (and maybe Windows Phones as well) since that would be where the biggest monthly savings can be found. Furthermore, it also makes it much less likely that an Android user on a low cost phone would switch to an iPhone, so Apple's ability to gain new users in the US may slow even more than it already has.

  • Report this Comment On December 08, 2013, at 7:09 AM, Breaker18 wrote:

    I keep getting emails from this author to read his articles, but they all lack factual data and are mostly BS pieces bashing Apple. Please stop cluttering up my email!!

  • Report this Comment On December 08, 2013, at 7:37 AM, MightyMinnow wrote:

    Its time to get rid of Stephenson and his spies. Were in the security business.

  • Report this Comment On December 08, 2013, at 9:18 AM, TheWick wrote:

    This is a half baked article with some factual data but without either understanding the full story or ignorance. Ask any major Mobile provider about the importance of Apple to the business, revenue per account generated, customer loyalty etc. Then you can write something meaningful.

  • Report this Comment On December 08, 2013, at 9:44 AM, larryw101 wrote:

    This bozo, know nothing author Sam Mattera has pumped out over 45 Apple bashing articles just in the past year alone. He has absolutely NO CREDENTIALS and has never been right yet on anything he's written on Apple.

    Motley Fool is no longer a good source of information for investing. And this clown Mattera, he needs find some other way of making money other than the pennies a click he gets when click on one of his articles. He knows nothing about Apple.

  • Report this Comment On December 08, 2013, at 9:59 AM, spyfly2 wrote:

    Sam gets a tingle up his leg bashing Apple..

  • Report this Comment On December 08, 2013, at 9:59 AM, inn8 wrote:

    x

  • Report this Comment On December 08, 2013, at 10:09 AM, wlknstk wrote:

    I have used T-Mobile for 12 years now. I buy my phones from e-bay. I pay T-Mobile $100 for 1000 minuets used at .10 a minute or for one year of service witch ever comes first. Perhaps the other phone companies should learn from T-Mobile and pick up a share of a market of people that want to simply have phone service without all the bells and whistles.

    Larry McPheeters

  • Report this Comment On December 08, 2013, at 10:10 AM, inn8 wrote:

    Sorry for the previous post, didn't know I was signed in. (no, that wasn't a kiss)

    Anyway:

    When will people wake up and realize the subsidy model ends up costing them much more than paying for the phone and service separately?

    Sam, Instead of propagating the myth that subsidies actually allow people to get something for nothing, why not use your journalistic talent and public access to explain the benefits and disadvantages of both the subsidized and outright purchase models.

    Personally, I believe mobile service provides should have separated service and hardware costs years ago, but it was obviously not to their advantage to do so.

    I've done the math, bought my own phone and shopped around for a service only plan, without contract so I can switch any time a better offer becomes available. I will never sign up for another contract offering a subsidized phone ever again unless the service provider really wants to pay for my business.

  • Report this Comment On December 08, 2013, at 10:55 AM, Chrisell13 wrote:

    Every new thing is supposed to be the iPhone or iPad killer, yet never is. Apple, who put the smart phone on the map sells record amounts of each of their newest devices, and should AT&T actually move forward with this plan as you stated then the only thing they will accomplish is to send a bunch of their iPhone customer base over to Verizon, which is where they should be anyhow since AT&T stinks.

  • Report this Comment On December 08, 2013, at 11:29 AM, larryw101 wrote:

    This author,Mattera, is getting bashed hard on Yahoo and deservingly so I might add.

    He has a compulsion to bash Apple every week.

    Where in the heck does Motley find these bozos at?

    Shame on Motley !

  • Report this Comment On December 08, 2013, at 11:37 AM, advisor13 wrote:

    I have a better title for your article: "Will I ever learn to write a meaningful article?" You are simply making the most ridiculous comment you can think of, making it the title of your article & then trying to come up with anything that could support it. The fact that a pricing strategy of any carrier could "Crush" apple, the largest company on the planet is beyond ridiculous. You and the Motley Fool website for allowing you to be you, are both a complete joke.

  • Report this Comment On December 08, 2013, at 1:16 PM, chirp08 wrote:

    A lot of other countries already do this. Why it is such a big deal. Germany has the option of buying a phone out right or doing monthly payments for the phone. the US phone carriers only care about stupid money and the way to F*** over the customer. AT &T always changes there plans that is why they are so messed up... Why don't they start thinking about the customer and not about their pocket books and more customers would be happy with them. Al the news is always about AT&T changing something or screwing over their customers. Look at Verizon they are hardly ever in the news,, guess they are doing something right.

  • Report this Comment On December 08, 2013, at 2:13 PM, johnestromjr wrote:

    Sam, your anti-Apple bias is showing. AT&T's new plan will make it easier for Apple iPhone's new customers to finance their iPhone. They're NOT going to dump their iPhone for an Android because of AT&T's "new plan". Just the opposite. And Verizon is a far better company anyway - so they can dump AT&T and migrate. Or to T Mobile which is an even friendlier company. It's about Apple's ecosystem and their far better user experience and the fact ALL Apple devices can interact with one another whereas Android's can't. Forget AT&T - all they are is the "fat dumb pipe" and they have lots of competition.

  • Report this Comment On December 08, 2013, at 2:25 PM, larryw101 wrote:

    Sam Mattera, this author, is totally incompetent and has never once been right in any of his predictions on Apple. He has zero credentials.

    I just shake my head whenever I read his articles.

    I swear Motley allows this garbage journalism to bait viewers into clicking on articles with titles such as this so they can they show advertisers how many readers they attract.

    Shame on Motley and Mattera …….. !

  • Report this Comment On December 08, 2013, at 6:06 PM, JHawkinTexas wrote:

    Time to dispel the thesis that loss of carrier phone subsidies will kill Apple's phone business.

    First, the MacBook, iPad, and iPod are not subsidized yet they sell very well. The MacBook continues to take share in the laptop space despite it selling at a premium price to Windows PCs. The iPod still owns the MP3 category and many people can argue about the market share for the iPad, but Apple is selling all they can make.

    Second (and here's the most important point), if the carriers decide to ditch the subsidy model, then as a consumer my only incentive is to find the carrier with the cheapest plan for data and voice. Because of number portability, I will switch my plan to the carrier offering the lowest price in a nanosecond. This will set up a "race to the bottom" for the carriers. Very soon, the difference in coverage and quality of service between the carriers will be negligible...leaving price as the differentiator.

    Bring it on. I'm ready for the carriers to drop the subsidy model. I'll still upgrade to the latest iPhone and sell my old model for $200 less than what I paid for it. The carrier's revenues will start going down, not up, AND THEY KNOW THIS.

  • Report this Comment On December 08, 2013, at 7:17 PM, FreeRange1 wrote:

    What absolute nonsense! Do you really believe that a difference of $13 per month is going to make a huge difference in iPhone sales, especially for people already in the superior ecosystem? Another moronic opinion piece.

  • Report this Comment On December 08, 2013, at 7:19 PM, FreeRange1 wrote:

    Oh, and let's not forget the much higher resale value of an iPhone where you recoup a significant amount of your initial cost.

  • Report this Comment On December 09, 2013, at 12:50 AM, AcuraT wrote:

    I guess I am out of it. Bought a Windows phone and I seem to like it. Got the kids Surface tablets - and now the other kids in the class are jealous of them with their iPads.

    The world is changing, lovers of Apple. Those units are still popular, but the compeitition is catching up. I don't expect Apple to lose overnight, but without innovation, I do see Android and to a lesser degree, Microsoft, give them fits over time.

  • Report this Comment On December 15, 2013, at 3:45 PM, CPA01 wrote:

    Lots of ignorant iPhone users here.

    Paying $199 down payment for your iPhone and then reselling it for $150 two years later does not mean you only paid $50 for the phone.

    If you're on Verizon, that's $35X24+199-150= $889 you paid for your phone after device fees.

    Does that look like a good deal after all? Resale vale on a $1,039 phone was just 14%.

    Furthermore, T-Mobile's iPhone sales are a small portion of its total sales, especially compared to AT&T's 80% reliance on iPhone sales. Countries that don't subsidized, particularly in Europe have very low iPhone adoption rates.

    Only in America largely (and Japan to a degree), where you can get an iPhone for "free," do we have a majority iPhone market.

    The parts of the world where total cost pricing is clearly made visible to the consumer have not adopted iPhones in large amounts.

  • Report this Comment On December 16, 2013, at 10:24 PM, larryw101 wrote:

    To: CPA01

    You need to write for Motley Fool. You would fit like a glove. Your comments are laughable and go in line with the foolish logic of Motley. They also would pay you a penny a click too !

    To suggest that the iPhone is costing the user $1,039 and giving no value to two years of cellular phone service from the carrier is a perfect example of your flawed logic.

    Give Tom Gardner a call, I'm sure he would love to hire another fool like you.

  • Report this Comment On April 20, 2014, at 11:19 PM, Raven11111 wrote:

    I didn't read all the comments but what I have read was all about the price of the phone. I was told that AT&T charges $10 a month for insurance and covers theft. Apple's insurance is $99 for 2 years, it might be longer, but it does not cover theft. I bought my iphone at apple because of the cost of insurance. I also have the app for find my phone. I never had to use it but I hope I can find it if I lose it or if it gets stolen.

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