T-Mobile’s Growth Is Bad News for Apple

According to new data from Kantar Worldpanel, T-Mobile is growing rapidly, possibly at AT&T's expense. That could be bad news for Apple.

Jan 8, 2014 at 12:00PM

No wonder rival AT&T (NYSE:T) has gotten so aggressive -- T-Mobile's (NASDAQ:TMUS) "un-carrier" initiatives have proven to be wildly successful. According to new data from Kantar Worldpanel, T-Mobile almost doubled its share of U.S. smartphone sales in the third quarter of 2013, while market-leaders AT&T and Verizon lost ground.

T-Mobile's growth flies in the face of industry observers, who have long argued that consumers favor smartphone subsidies. If current trends persist, subsidies could soon become a thing of the past -- and that's not good for Apple (NASDAQ:AAPL) shareholders.

T-Mobile ends contracts
T-Mobile spent 2013 rolling out a number of initiatives that cumulatively comprise its un-carrier strategy, the most significant of which has been the end of two-year contracts. Starting in 2013, T-Mobile did away with them -- new subscribers pay for their service strictly on a month-to-month basis. Because T-Mobile's subscribers now have the freedom to easily ditch their service, T-Mobile no longer pays for its subscribers' handsets. T-Mobile customers can buy their phones in full, or pay them off in monthly installments, but either way, they're paying the full retail price.

This stands in stark contrast to the business model long championed by T-Mobile's rivals, including AT&T. Under the standard, two-year contract model, carriers foot the bill for much of their subscribers' handsets, but lock them up with a contract.

AT&T warns smartphone subsidies are coming to an end
AT&T, however, could soon join T-Mobile in ditching subsidies. Last month, AT&T's CEO warned that the current smartphone subsidy model cannot continue to persist.

AT&T still offers subsidies and contracts for now, but in December the carrier rolled out a new initiative structured much like T-Mobile's. AT&T's new "Mobile Share Value" plan lets subscribers pay for their service on a month-to-month basis but doesn't cover the cost of their phone. Last week AT&T went further, offering to give T-Mobile subscribers up to $450 in credit if they switched to one of AT&T's new plans.

Based on Kantar's recent numbers, AT&T has reason to shake up its business: last quarter, AT&T sold just 28.3% of new US smartphones, down from nearly 35% in the same quarter last year.

Apple's iPhone business remains subsidy-dependent
A war between the two companies is good for consumers, but potentially bad for Apple. The King of Cupertino still derives the vast majority of its profit from the iPhone, and sales could take a hit if smartphone subsidies go away.

Although Apple has just slightly more than 13% of the global smartphone market, it sells more than 43% of the smartphones in the U.S. The reason for the discrepancy comes down to subsidies -- U.S. carriers' willingness to heavily subsidize Apple's iPhones has made them affordable to U.S. consumers. In most other countries around the world, smartphone subsidies are uncommon.

The pricing pressures that drive global consumers to pick alternative handsets could apply in the U.S. if smartphone subsidies go away. Without subsidies, the $350 Nexus 5 looks much more attractive when compared to Apple's $649 iPhone 5s. And even if consumers continue to buy Apple-made handsets, they could choose to hold on to their old models for longer, resulting in much longer upgrade cycles.

Watch for other carriers to copy T-Mobile
T-Mobile's incredible success has shown rival carriers that it's possible to attract customers even without offering smartphone subsidies. With AT&T's sales on the decline (according to Kantar), the carrier seems to be following T-Mobile's lead in abandoning subsidies.

If this trend spreads to other major U.S. carriers, Apple shareholders should be concerned.

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