Apple and Samsung Could Be the Losers in AT&T's War With T-Mobile

AT&T (NYSE: T  ) has gone to war with T-Mobile (NYSE: TMUS  ) . On Friday, AT&T announced that it will give T-Mobile subscribers up to $450 in promotional credit for each line they bring over from T-Mobile to AT&T.

The move signals a shift in the wireless industry, as carriers compete to steal subscribers from each other. It also suggests a new standard in the way smartphones are purchased -- with potentially devastating consequences for both Apple (NASDAQ: AAPL  ) and Samsung (NASDAQOTH: SSNLF  ) .

The end of subsidies in the U.S.
T-Mobile was able to attract the attention of AT&T with a number of major revisions it made to its business model in 2013 (collectively referred to as its "un-carrier" initiatives). Most notably, T-Mobile ceased offering standard two-year contracts and the smartphone subsidies that came with them.

Now, T-Mobile subscribers pay only for their service on a month-to-month basis. If they need a new handset, they can purchase one outright or pay for it in monthly installments, but T-Mobile doesn't cover any part of the handset's cost. In contrast, wireless providers like AT&T charge more monthly but attract subscribers by essentially buying them a new smartphone every two years.

In December, AT&T followed T-Mobile's business strategy, announcing a new plan -- the "Mobile Share Value" plan -- that would, like T-Mobile's, allow subscribers to significantly reduce their monthly bill by forgoing subsidies. AT&T continues to offer two-year contracts, but perhaps not for much longer -- AT&T's CEO recently hinted that smartphone subsidies will soon be coming to an end.

AT&T's offer is all the more notable because, to get the full $450 credit, T-Mobile subscribers must sign up for a plan that doesn't include subsidies.

How Apple could suffer
It's overwhelmingly clear that Apple's iPhone business depends on subsidies. In markets where subsidies are common and generous (like the U.S. and Japan) Apple's iPhone takes a sizable chunk of the market; where they are uncommon, Apple has only a minority position.

If AT&T drops subsidies entirely, and other carriers follow, it stands to reason that Apple will sell far fewer iPhones. Many of Apple's customers will continue to purchase $649 iPhones, but more could opt for cheaper Android handsets. If you're not getting a subsidy, Google's $350 Nexus 5 or Motorola's $400 Moto X look far more attractive. Though the phones might not be as good as Apple's iPhone, they've both received stellar reviews, and many consumers could find them to be "good enough."

Even if iPhone buyers are hooked on Apple's handsets, they probably won't upgrade to newer models as often as they have been. As it stands, AT&T subscribers on a two-year contract don't see their bills go down when their phones are paid off. Since you're really not saving any money by keeping an old handset, upgrading to a newer model every two years is a no-brainer.

However, if you're a T-Mobile subscriber or are on AT&T's subsidy-free plan, your bill drops when your phone is paid off. If the new iPhone doesn't impress you, you can keep an extra $50 in your pocket every month by holding on to your old phone. If these plans become the standard, smartphone upgrade cycles should lengthen significantly.

Samsung will also be pressured
Of course, it isn't just Apple that stands to lose. Samsung, also, could be on the hook. In fact, back in June, ABI Research reported that carriers subsidize Samsung phones more than Apple-made handsets. Unlike Apple, Samsung allows U.S. carriers to install their bloatware apps on its phone, perhaps explaining their generosity.

Samsung is a more diversified business than Apple, both in the products it makes and the price points it targets. Still, about two-thirds of the profit Samsung brings in comes from its mobile devices, and despite offering cheaply made phones at bargain prices (something Apple has resisted), the majority of Samsung's mobile profit comes from its expensive, high-margin flagship Galaxy S and Galaxy Note devices.

Analysts at Berenberg Bank (via Business Insider) noted that Samsung's portfolio of high-end devices basically subsidizes its cheaper handsets -- as one might imagine, there isn't much profit to be squeezed out a smartphone that retails for $100 to $200.

The $350 Nexus 5 is widely believed to be sold at a loss, and it's unlikely that Motorola is making much money on the $400 Moto X. As a search giant, Google may be able to afford to subsidize its hardware, but Samsung isn't built to do so.

The end of smartphone subsidies could be the end of iPhone and Galaxy dominance
AT&T's announcement on Friday was a harbinger of things to come: U.S. wireless carriers are moving away from subsidies. How long that takes remains unknown, but investors in both Apple and Samsung should keep a close eye on this unfolding trend.

Both companies have built their recent successes on carriers willingness to foot the bill for their subscribers' handsets. As that goes away, both companies could be pressured.

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Read/Post Comments (24) | Recommend This Article (17)

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 January 04, 2014, at 7:51 PM, spyfly2 wrote:

    Another worthless article.

  • Report this Comment On January 04, 2014, at 8:36 PM, gsagi wrote:

    Carriers never gave subsidies: they provided two-year (short-term) loans for smartphones that generated income by using data. While the rhetorical acrobatics of their leaders may be important to decode the bottom line is not going to change: they will need smartphones that are fun to use to gobble up data-plans. They will try out all sorts of clever schemes with monikers but the fundamental economy of their service will not change. We are way beyond of the good-enough gadget times, Sam. Besides the murkiness

  • Report this Comment On January 04, 2014, at 9:01 PM, rmgt008 wrote:

    I think people like their iPhones and Galaxy S's, and the companies behind these innovations, far more than their carriers. The carriers will figure this out when people flock to Verizon or some other carrier that continues to subsidize phones.

    Nonetheless, my paragraph above assumes that subsidies result in a total length-of-contract cost to the consumer that is less than non-subsidy carriers. If this assumption is not true, then consumers will be perfectly happy to buy their top-of-the-line phones over the length of a contract via financing. Nothing changes.

    Goddamnit, I fell for some more click bait. I'll continue to make money of Motley Fool's negative sentiments: invest where it predicts doom, and you'll be a very rich person!

  • Report this Comment On January 04, 2014, at 9:23 PM, JackBaker1 wrote:

    A negative article on Apple from Sam. Surprise, Surprise. How may things did you spin negatively for Apple in 2013? 30? 40? More. I'm sure this will be the first of many in 2014. You're going to look pretty silly when Apple hits all-time highs in 2014

  • Report this Comment On January 04, 2014, at 10:36 PM, IngramR wrote:

    A 2 year contract on every carrier (except T-Mobile) is just essentially a loan the phone provider gives you in which you pay back through the life of the contract. Who doesn't understand this?

  • Report this Comment On January 04, 2014, at 11:15 PM, eldernorm wrote:

    The article says it all in one part. "As it stands, AT&T subscribers on a two-year contract don't see their bills go down when their phones are paid off. Since you're really not saving any money by keeping an old handset, upgrading to a newer model every two years is a no-brainer "

    Of course people upgrade every two years. Its stupid not to. But for ATT to keep their current cost, they will lose tons of customers. Its an either /or condition. Price high - new phone cheap...... Pay total cost for new phone - service cheap.

    just saying.

  • Report this Comment On January 04, 2014, at 11:27 PM, johnestromjr wrote:

    Sam, we can always rely on you to paint the most dire of consequences for Apple.

    There ARE no subsidies you "Fool". Those "subsidies" are methods of financing only. In order for AT&T to make MORE $$$ they buy an Android or Apple device, finance it so as to rope their "customer" into a TWO YEAR contract then the "customer" pays for the service AND the device. If AT&T no longer wants to front end that cost they don't have to but I'm sure others will. What AT&T is doing is saying to their customers - pay for your own device and WE will make your monthly payment cheaper. Same with the other major carriers Sam. ALL of them are fighting for every customer so if you buy your own device and go to whichever carrier YOU choose then you WILL save money. But again, Sam, that "subsidy" you waffle on about is NOT a subsidy but a financing gimmick only. A subsidy is where a third party actually absorbs that cost and the customer doesn't repay. Like WE are subsidizing Obama's Food Stamp program. The recipient pays NOTHING for Food Stamps and WE the taxpayers pay for the program while Obama enjoys the benefits of spending OUR money for his own benefit. See how a subsidy works Sam? I doubt it. :/

  • Report this Comment On January 04, 2014, at 11:53 PM, Aditya2008 wrote:

    Will never go to AT&T hated the customer service. even when I had them for just a week.

  • Report this Comment On January 05, 2014, at 12:06 AM, bravosuperpower wrote:

    I feel AT&T will never loose unless every other carrier provide true multi-task phone. With AT&T you can talk, text, watch a movie, and surf the web all at once, unlike Sprint. I was so upset when I got the iPhone 5 on Sprint. I couldn't talk and text. I was happy when my phone got stolen. That same day I went rite back to AT&T.

  • Report this Comment On January 05, 2014, at 2:18 AM, pd83 wrote:

    bravosuperpower - I can do that on my Verizon Galaxy S4. AT&T is not the only carrier that can multi-task. All LTE Android phones on Verizon have this capability. For some reason you cant do that with the Verizon Iphone which is one of many reasons I went with the Android over the Iphone.

  • Report this Comment On January 05, 2014, at 3:00 AM, HTJISRSVP wrote:

    um, why would I leave to go get on a contract.. No contract is the way to go..

  • Report this Comment On January 05, 2014, at 6:09 AM, Pyngewer wrote:

    Some of you missed the point completely or work for another carrier. The point is that people don't want to be locked into a contract now have a choice. I think it is going to be better for the phone companies. Now you don't have to be stuck with 2 year old tech if you want a new phone. You can just BUY it. I got T-Mobile and paid my phone off in 6 months. Now I can upgrade at ANY time. If I want the Note 3, I can go out and BUY it. That means that you can keep buying Iphones & Samsung and don't have to wait. More sales for the companies with the hot phones. Why would that be a bad thing? Even with the standard 25 a month payment, I was still cheaper than AT&T with the same services. So the plans have merit for the mid to low end cell customer & to phone companies that want to sell the newest product more.

  • Report this Comment On January 05, 2014, at 6:19 AM, sieandme wrote:

    Hey Johnes, I think what the "FOOL" is saying is a very large part of AT&T customer base can not afford the Iphone or Galaxy S without the "loan" and will opt for a cheaper less expensive smartphone which in turn could hurt sales of both.

    A smarter business plan for AT&T would be to provide the option of a cheaper data plan to those who purchase their phones and the "Subsidized" plan for those who can't afford the cost up front.

  • Report this Comment On January 05, 2014, at 7:57 AM, rw1270 wrote:

    Whether they are or are not subsidies, it is of no consequence. What's important, is perception of price by many subscribers ("only $199", vs. "as much as $699"). Second, more important thing is an upgrade cycle. "Old style" contract guaranteed a purchase from a subscriber every two years (otherwise one was a looser paying same rate, but using an old phone). With "new contract" style, those more frugal may stretch the upgrade cycle as much as they see fit. They can buy a new phone any time they wish, it could be three, four, or even five years - as long as it works and is good enough for them. It matters, especially in market that is near saturation point, such as premium phones in the US.

  • Report this Comment On January 05, 2014, at 8:02 AM, JbUps wrote:

    I'll be interested in hearing Cooks response to this issue if subsidies /loans ever stop. I can't believe they never talked about it and developed a plan should this happen

  • Report this Comment On January 05, 2014, at 11:21 AM, xspeedy wrote:

    The subsidized plan is nice for where employers will pay for someone's total monthly bill, but not the handset.

    And as for the comment about being able to upgrade when you want, I don't see people dropping $800 for a Galaxy Note every year. People only upgrade as often as they do because it doesn't make sense not to. One would just throw money away paying to subsidize the phone that is already paid for.

  • Report this Comment On January 05, 2014, at 11:33 AM, ZenCloud wrote:

    I TOTALLY AGREE WITH , Pyngewer

    I don't want a contract anymore! I've had enough & when I switched from AT&T's crappy customer service to a NO Contract, it was heaven.

    After the switch, I was also able to change my monthly payments from $75 to $55 and save approx. $240 per year. Who doesn't want that in their pocket?

    Now I'm looking at a Samsung Note 3 but with the same company or maybe doing a complete buyout of the phone and just do the same monthly payments, like on Wirefly through Sprint.

    But 2-year contracts are DEAD and I won't go back. And didn't AT&T just buy Cricket to keep up with T-Mobile? And Amazon will continue to sell these phones from all companies & all you need is a SIM card and ca$$$$$h and away you go. I'd rather save up $800 for a phone, buy it outright & just pay $50 a month than go back to contracts. I don't want to be a slave again!!!

    I refuse to go back to AT&T but I'm still looking, asking questions & reading in places like this what I should do for my next phone I'm going to get later this year. But it will be a no contract phone for sure.

  • Report this Comment On January 05, 2014, at 11:45 AM, ZenCloud wrote:

    To xspeedy

    I upgraded because the phone I had didn't have what I needed to keep up with the office, family & friends on one phone.

    I've asked total strangers when I see they're using a Samsung S4/Note 3-4/Tab how they feel about their phones & all have said, "THEY'VE FOUND THE ONE"! They're not upgrading after this. They're happy with their Samsung and most of the aren't switching if Samsung comes out with another phone. Just like people who are happy with their iPhone 4S and didn't upgrade to a 5. Some people just aren't going to switch once they've found their "one".

    I feel the same way about when I upgrade. I'm taking my time on this next upgrade because I plan on keeping it no matter what Samsung or Apple come up with. And Apple is rumored to come out with a 6 inch phone later this year or next year.

    I jumped too fast with my HTC and I've outgrown it. Now, I'm going slow & steady to win this race. Hopefully, I'll check back in this post when I decide what upgrade I did get and let you know. LOL!

  • Report this Comment On January 05, 2014, at 11:59 AM, ZenCloud wrote:

    AT&T bought Cricket & the paperwork will be dry around June or July 2014. However, if you want a Samsung S4, you have to "apply" and have your credit checked. If you don't get approved, you don't get your phone. That's soooooooo wrong I couldn't believe it.

    Why not have the customer put up half and pay the rest within 6 months? This is the worst thing Cricket & AT&T could have done. But we'll see how these two companies will work together to compete against T-Mobile & Sprint with this new plan or if AT&T will tweak this. But the credit report just keeps it out of the hands and the company is losing money.

    Apparently they think people don't have that type of money and they're wrong! People do have that type of money. It's just the way Cricket is going about having people "buying & owning" the phone.

    You can still get these phones from Amazon or wherever, get a SIM and just connect to the company. So I'm still looking and waiting to see how Cricket & AT&T will work this out in 2014.

  • Report this Comment On January 05, 2014, at 12:41 PM, Jumbybird wrote:

    It's pathetic how much our economy depends on idiot phones.

  • Report this Comment On January 06, 2014, at 4:48 AM, iphonerulez wrote:

    If carrier smartphone subsidies went away, wouldn't Apple simply be able to provide low-interest or interest-free financing for their own iPhones? Apple certainly has enough reserve cash to support such a plan.

  • Report this Comment On January 06, 2014, at 5:00 AM, iphonerulez wrote:

    It's strange. I don't think I ever see a scenario that concerns Apple where Apple comes out ahead or has an advantage over competitors. It seems that in every scenario Apple always comes out the loser or ends up having a huge disadvantage compared to everyone else. I'm guessing the disadvantage must be always due to the higher cost of their products. I'm surprised that Apple can't find ways around that or is there actually some universal rule that says that companies selling the cheapest product always have the greatest advantage in selling the most products. I never quite understand this thing about selling products with very low margins and poor customer support and yet being able to stay in business.

  • Report this Comment On January 06, 2014, at 6:32 AM, Thompr97 wrote:

    What do you think customers who switch to AT&T from TMobile are going to do with that $450 credit they get for signing a contract? Buy more iPhones, that's what.

    Apple is not just helpless in all this. They could offer financing or become an MVNO and make money off the service side as well. Heck, they could buy AT&T itself... not that they would. All I'm saying is don't count the boys from Cupertino out. They have power and smarts. They will figure out a way to make their HIGHLY DESIRED iPhones affordable.

  • Report this Comment On January 08, 2014, at 11:20 AM, GirlsUnder30 wrote:

    Read how Apple is trying to trip its production costs:

    http://caps.fool.com/Blogs/its-kinda-corning-to-discuss/9105...

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