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T-Mobile’s Growth Is Bad News for Apple

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No wonder rival AT&T (NYSE: T  ) has gotten so aggressive -- T-Mobile's (NYSE: 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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Read/Post Comments (18) | Recommend This Article (1)

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 08, 2014, at 12:36 PM, jdmeck wrote:

    Your theory is flawed. If T-Mobile is doing well selling iPhones without subsidies because people don't care, then what difference does it matter to Apple who pays for the phone, as long as people are willing to pay, which you say they are.

  • Report this Comment On January 08, 2014, at 2:49 PM, RedLoki wrote:

    Long-time T-Mobile customer. I bought new iPhone 5s. Paid for phone up front. Very happy with T-Mobile. Love the 5s.

  • Report this Comment On January 08, 2014, at 4:36 PM, larryw101 wrote:

    He's at it again. This so-called author who knows nothing about investing is consumed with having to write an Apple bashing article each and every week.

    He's a joke if you've ever seen him in a video. The audio and video are distorted and he doesn't even comb his hair. He's real clown. No credentials either.

    Subsidy decreases will only mildly affect sales. People will still pay for quality and will not gravitate to inferior products which they use for a year or longer.

    Attention Motley: Please find someone other than the likes of this bozo.

  • Report this Comment On January 08, 2014, at 4:39 PM, Thompr97 wrote:

    People who want iPhones will willingly pay the monthly fee to get them if they can't afford them up front. Fans in China sell their kidneys.

    Even if not, Apple isn't helpless. Engage your imagination, for the moment, and think about what Apple could do with $150 B if it seems like people stop buying iPhones because of new carrier policies. They could buy a controlling fraction of AT&T, even after first paying repatriation taxes.

    I guess you'll never really understand that an Apple fan's loyalty is not just skin deep, and Apple's power and creativity can change circumstances is very short order.

    You are very very wrong about Apple, Sam. Maybe you'll realize that by next year.


  • Report this Comment On January 08, 2014, at 4:57 PM, wlweldy wrote:

    This analysis is worthless!!! Without the breakdown of Apple or other smartphone numbers at T-Mobile, or the smartphones losses at AT&T, yes anything is possible!! When will any so called analyst ever acknowledge the brand loyalty of Apple customers. It is also possible that Apple gains when most of these new T-Mobile additions are iPhones.!! Junk article!!

  • Report this Comment On January 08, 2014, at 5:01 PM, metoo5 wrote:

    Apple is not dependent on carrier subsidies, contrary to popular belief. If all carrier subsidies on all carrier subsidies were ended, Apple would be in the best shape of all the handset makers. It is other handset makers with lesser quality and function products that would suffer in proportion to Apple.

    Apple is playing the subsidy game because people are used to not paying the full cost of the phone upfront. In other words, it is mutually beneficial to Apple and the carriers right now. And t-mobile may not call it a subsidy or a plan like the other carriers, but they do have deals that function identically to plans where you sign a contract where you pay the cost of the phone in monthly installments if you wish. Go to their site right now and you'll see for an iphone 5s purchase options:

    1) $600 full retail price

    2) $0 up front, + $25 x 24/mo. If you cancel wireless service, remaining balance on phone becomes due. 0% APR O.A.C for well-qualified buyers.

    How is that not a plan? There is nothing wrong with buying a phone outright, but right now only a minority is willing to do it. Apple is playing a shrewd hand and is holding all the cards to handle any shift in the way phones are purchased or paid for, whereas it isn't clear the other handset makers would be able to adapt as well. This article is just more FUD from the usual suspects.

  • Report this Comment On January 08, 2014, at 5:28 PM, larryw101 wrote:

    Waste of my time to read such garbage.

    Stop bashing Apple and get a life...... !

  • Report this Comment On January 08, 2014, at 5:29 PM, Luap wrote:

    We are on a T-Mobile family plan. We have 5 users. We all upgraded to iPhones during 2013, paying for each one outright. Our average bill for each of the 5 of us runs between $24 and $34 per month, depending whether we purchase a 2 GB data plan. We each get 500 MB of data free. Since we use the phones mostly where there is WI-Fi, there is no need for a data plan in most cases. Also when we do go over the 500 MB limit, we just get a little slower data, but it is not cut off. How can you beat this kind of a deal? Go T-Mobile and Go Apple!

  • Report this Comment On January 08, 2014, at 5:37 PM, JKramarz321 wrote:

    Subsidy or no subsidy, if you look for a Samsung Galaxy 4s, they're about $610.

    An iPhone 5s is about $640.

    Yeah...I can get a Galaxy and save 4.5%


  • Report this Comment On January 08, 2014, at 5:51 PM, gametv wrote:

    just because T-mobile has eliminated subsidies doesnt mean that at&t or verizon can do it. they already have a large base of iphone customers who might move to another carrier if they eliminate subsidies. much more likely that at&t eliminates the subsidies on high-end android devices, like Samsung's phones. iphone owners will switch carriers before phones, but android owners can switch to a different android phone, since there are many vendors.

  • Report this Comment On January 08, 2014, at 5:58 PM, gametv wrote:

    this Kantar survey is a bit wacky. it shows ios losing 9% share of smartphone market share. i guess that is possible as the market for smartphones grew at the low end, but there are other surveys that show apple has retained or grown their market share year over year. i wouldnt go betting everything on this data point.

  • Report this Comment On January 08, 2014, at 6:44 PM, EyeHateFools wrote:

    As consumers figure out how to play this, it will probably help Apple. People that keep their phones longer will pay less, but that will be more of the mid-range and low-end priced phones that have no trade-in value (hurts Samsung, et. al.).

    iPhones can now be traded in yearly for about a $300 difference in cost (at the 1 year anniversary Gazelle was offering to buy the iPhone at $350), vs what was a $200 fee, plus a 2 year contract, plus $15 more per month. In other words, iPhone users can pay less than what they have been paying. Trade in the iPhone and take the $350 plus the $200 that consumers are used to paying and finance the last $100 ($8.50/mo), and drop your monthly charge by $15 (net savings $6.50/mo) ... and NO contract.

  • Report this Comment On January 08, 2014, at 6:52 PM, metoo5 wrote:

    JKramarz321 pointed out the other dirty secret the FUDders wish to ignore . iPhones aren't much more expensive than competitor phones, in some cases they are less.

  • Report this Comment On January 08, 2014, at 10:54 PM, lrd555 wrote:

    Apple's going to break $15 Billion in profits this quarter. Ain't that a shame. T-Mobile's really screwing Apple out of a $20 Billion profit quarter.

  • Report this Comment On January 09, 2014, at 12:50 AM, MrRuprect wrote:

    This guy does slam Apple any chance he gets. But let's take a look at what's happening in the real world and not Mattera's make believe doom and gloom world. Here are some of the companies that haven't offered iPhones on their networks and the impact. Docomo in Japan was losing market share to rival telecoms. When they began offering the Iphone rivals started a subsidy price war, the result Iphone sales in Japan now make up 61% of the overall market, and iPhone sales at Docomo are over 50% of all their smartphone sales.

    Another company you may have heard of, China Mobile was also losing customers in mass to competition because they didn't offer the iPhone. Now that China Mobile will soon be offering the Iph, China Telecom cutting iPhone prices by 15% in anticipation of that deal. The likely scenario there will be similar to the one that played out in Japan. Look for China Unicom to increase it's subsidies as well.

    Also Reliance communications in India is also now offering a subsidy for iPhones, the first in India to do so.

    This is the second or third article buy Sam "the Apple Bear" in as many weeks. It's too bad he has a pulpit because if anything it appears to me MORE companies are offering subsidies not less. Even if ATnT were to cut subsidies people would just flock to rivals, I know I would.

    There are a number of reasons telecoms offer big subsidies for the iPhone and will continues to do so.

    1. iPhone users are typically more wealthy, and spend more time browsing, tweeting, texting, thus pay more per month in data fees. This is how the telecoms get their money back for the subsidies.

    2. iPhone owners spend more on online purchases, apps, downloads. So if you want to eliminate your wealthiest, most educated, most reliable clients by doing away with a subsidy feel free. Then watch ATnT stock dive like the reputation of Mattera. Can't wait to see that.

    All this info is out there for any who are curious, look it up if you don't believe me. It seems to me though that this guy Sam has an axe to grind with Apple.

  • Report this Comment On January 11, 2014, at 7:27 PM, larryw101 wrote:

    Mattera's reputation is has sunken to a new all time low. All you have to do is read the negative comments here.

    He appears very insecure. His only way of getting attention is to bash Apple very third day. Get a life Sam and comb that hair. You always look disheveled in those cheap videos.

  • Report this Comment On January 30, 2014, at 4:32 AM, PaulTee123 wrote:

    Macke said buybacks are for Idiots, he said Apple vaporized 5 billion in buybacks. Macke how long have you been in the business.?? Everyone knows that when a downturn occurs, a loss is only incurred when shares are sold.For Apple to have vaporized 5 billion dollars he would have had to put the shares back on the market at the downturn price. But he did not hence no loss,no vaporization. Cook is not the idiot,but you are.

  • Report this Comment On February 19, 2014, at 1:12 PM, overthetop wrote:

    Why is it that when anyone even sneezes anywhere in the world, Apple is in trouble? Samsung coming out with new phone? Apple is in trouble. AT&T not going to subsidize phones? Apple is in trouble. T-Mobile making people pay for their phones? Apple is in trouble. I mean come on.

    In the meantime, Apple is doing well and producing quality products (minus your usual grumps) and their stock keeps going up.

    I guess Motley Fool is trying very hard to fool people. Stop trying. Just look at the user comments. Your readers are a lot smarter than you people are.

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Sam Mattera

Sam has a love of all things finance. He writes about tech stocks and consumer goods.

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