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Apple Inc. Admits It Needs Smartphone Subsidies -- AT&T Says Subscribers Don’t Want Them

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Apple's (NASDAQ: AAPL  ) near 8% sell-off on Tuesday was the by-product of its disappointing iPhone sales -- although the company sold a record 51 million smartphones, it was far fewer than analysts anticipated, and total sales rose just 6.7% from the prior year.

The North American market was particularly bad, with Apple's business actually contracting. Unfortunately for shareholders, North American iPhone sales could remain muted: Carriers, including T-Mobile (NYSE: TMUS  ) and AT&T (NYSE: T  ) , are starting to ditch subsidies -- and based on Apple's earnings call, the company's business still depends upon them.

Tim Cook cites carriers' changing policies
Apple's CEO, Tim Cook, blamed the iPhone's disappointing North American performance partially on poor inventory management -- Apple had anticipated more demand for the iPhone 5c. But Cook also cited changing carrier policies, noting that:

The other thing that happened in North America specifically was that some carriers changed their upgrade policies. And this affected last quarter, and will have some effect on the current quarter. This restricted customers who are used to upgrading earlier than the 24 months that they're allowed and sort of stretched the time out to be a hard and fast 24 months. And so that's a major factor playing into the North American results.

Back in April, Verizon Wireless extended the amount of time customers had to wait before they could upgrade from 20 to 24 months. AT&T did the same in July. Obviously, this could weigh on Apple's North American iPhone sales -- subscribers on those two networks could've planned to purchase a new iPhone last quarter, but, ineligible for a subsidy, held on to their old handset.

T-Mobile dumps subsidies and spurs revolution
Cook's answer serves to highlight just how dependent Apple is on smartphone subsidies. In countries where they're commonplace, like the U.S. and Japan, Apple's iPhone takes a large percentage of the market. Where subsidies are uncommon -- most of the world -- Apple's iPhones remain in the minority.

This is why Apple shareholders should be concerned by the trend taking hold in the U.S. wireless industry: the move away from subsidies. Last year, T-Mobile got rid of them entirely, instead offering financing plans that forced subscribers to pay for their handsets in full. Although some doubted that it would work, it proved to be wildly successful: T-Mobile is now the nation's fastest growing carrier.

Perhaps spurred on by T-Mobile's success, the other major carriers have rolled out similar plans. In December, AT&T unveiled the "Mobile Share Value" plan which, like T-Mobile's standard agreement, allows subscribers to reduce their monthly bills as long as they're willing to forgo subsidies. When AT&T reported earnings on Tuesday, it said a growing percentage of its wireless subscribers are choosing this plan -- a full 20% of new customers have taken AT&T up on its no-subsidy offer.

According to Consumer Intelligence Research Partners (CIRP), the industry as a whole is seeing growing demand for these plans. In fact, from July through December, nearly one-third of customers eligible for one of these plans elected them over alternatives.

No subsidies should result in fewer iPhone sales
For now, AT&T, Verizon and Sprint still offer subsidized plans, but perhaps not for much longer. During AT&T's earnings call, CEO Randall Stephenson said his industry as a whole appears to be moving away from them.

Should these plans become the norm, Apple's North American iPhone business could continue to suffer. Subscribers on these plans could opt for cheaper handsets (T-Mobile sells far fewer iPhones than its rivals) or delay their upgrades for a longer period of time.

Overall, it's overwhelmingly clear that Apple needs subsidies to sell its iPhones -- so the growing popularity of unsubsidized plans is a troubling sign.

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Read/Post Comments (7) | Recommend This Article (2)

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 29, 2014, at 10:15 AM, larryw101 wrote:

    It's the clown again, SAM, SAM, The Apple Bashing Man.

    This pimpled face kid the disheveled hairdo hanging in his eyes is the best example of the kind of fool Motley has to show and write for them. Tom Gardener, Motley's CEO, sure know how to pick them. Good job Tom ! So much for your credibility too.

    Apple "netted" $13 billion in profit this quarter and that's after paying out a dividend, buying back $8 billion in stock, funding acquisitions and paying R&D, MKT, G&A expenses!! They went from $146 billion to $159 billion in cash !! And this clown still writes at least 2 Apple bashing articles a week. This is his 2nd bashing article today on Apple.

    SHAME ON MOTLEY FOOL FOR THIS GARBAGE JOIRNALISM. Motley's reputation is at an all time low and it's because of articles like this. Take a survey Tom and find out for yourself.... I dare you. No one has any respect for Motley anymore. Anytime a Motley article is mentioned regarding any security it is mocked. None of their authors have any credentials or investment experience to speak of. Their videos are cheesy and very poorly scripted. They're done from home computers and the quality of content both visually and information wise is consistent with their amateur so-called contributing authors.

    Motley use to be a good source of financial information, but those days are long gone. I tried and politely asked for Tom Gardner's e-mail about a year ago to give him some personal feed back on how I and many others have seen Motley's credibility deteriorate. I received a reply back saying "we do not give out that information". Oh well, need I say more?

  • Report this Comment On January 29, 2014, at 10:31 AM, shortmanfl wrote:

    Not true! I recently upgraded my iPhone with ATT and will be eligible to upgrade yearly. I was given $200 credit for my trade iPhone.

  • Report this Comment On January 29, 2014, at 10:38 AM, Cintos wrote:

    The subsidy issue is certainly important. First off, let me note that Apple's iPads are NOT subsidized when purchased through a carrier. Signing one up to a 2-year data plan when equipped with a mobile option yields a "family plan" cost of only $10 per month. This has not been a deterrent to tablet sales from Apple's price list.

    If the carriers desire to drop subsidies on phones, fine - just give me a much-reduced monthly charge. Lord knows the current charge - over $50 a month - for a smartphone line includes enough extra $$$ to amortize the iPhone over the 2-year period.

    So without a 2-year contract signup, and me buying my own $600 iPhone, I expect I will save money in the long run, while enabling me and my family to quickly add or drop lines as well as carriers. Perhaps I will be joining the Tmobile crown sooner that I had expected. By, by VZ.

  • Report this Comment On January 29, 2014, at 10:46 AM, speechisntfree wrote:

    I'm not going to bash Apple..... I had their stock for quite a while through the ups and downs..... I finally got fed up with the scavenger day traders and prostitute bloggers constantly targeting a company whose financials should have it trading..... at a minimum..... in the mid 600's..... but because of the actions of the worthless bunch I just mentioned..... will remain range bound between $450 and $525 forever..... so I dumped it all at $527..... made some money..... and refuse to look back.....

    however..... now Apple is running around wanting to increase it's enterprise side of the house and seems to be looking for talent to hire to the tune of approximately 100 bodies.....

    who in here thinks the same way I do when I say one of the biggest mistakes Apple has made since Tim Cook took over is not buying Blackberry?..... they could have purchased it for about as much as lunch costs when they order pizza..... and even now..... why aren't they knocking on Blackberry's door?.....

    Yes..... I also own a chunk of Blackberry..... but even if I didn't..... I'd still be wondering why Mr. Cook hasn't decided that Apples and Blackberries would "jam" quite well.....

    Oh yeah..... I almost forgot..... besides Blackberry's enterprise reputation..... isn't there something about a keyboard thing too?

  • Report this Comment On January 29, 2014, at 11:37 AM, afonnes1980 wrote:

    I don't really get how bringing up a potential risk is "bashing" Apple. We all know how much money Apple has. Are they going to do something useful with it? I am sure they have product in the works, but I am sick of hearing Tim Cook say, "we have exciting new products lined up for the coming year." Can he not give just a tiny hint? All he has to do is give some indication that they actually are diversifying and people will eat this stock up. I don't understand why people get so emotional about this stock. Who cares if they make $500 zillion a year, if expectations are so out of whack that it doesn't matter? Should it be worth more money based on their sales/revenue/cash hoard/PE ratio? Heck yeah! That doesn't mean its going to happen. I think it stays range bound until they announce something exciting. Until then, everyone will yawn at their Iphone 15 and a hundred billion sold. Don't believe me- look at a 3 year chart! I'm not bashing, I'm looking to buy in if they can cater more to their investors and customers.

  • Report this Comment On January 29, 2014, at 11:44 AM, ranchrfl wrote:

    I've said it before and I say it again, there is such thing as a subsidy! Subsidy = Seller Financing. The phone companies are simply offering an a-la-carte menu.

    You can pay for the phone up front and get a lower monthly rate and no contract; you can have them finance the phone in some fashion and have no contract but as soon as you leave them, the phone has to be paid off, in full; or, you lock in a plan with the "subsidy" as you call it and, if you keep the phone for more than 24 months, the rate still stays high and the phone company makes more money.

    What is so hard to figure out Mr. Author? How about someone write an article with the headline The Subsidy Myth."

  • Report this Comment On January 29, 2014, at 6:46 PM, truenorth00 wrote:

    Wow. Look at the denial in the comments.

    Sure, AAPL is a phenomenon. But stock prices are based on future earnings expectations. That's what a lot of AAPL longs who happen to be Apple fans just don't get.

    I just bought in after being out for a while, because I think it's got some room to go up after this correction.

    That said, there's no doubt in my mind that this subsidy thing could bite Apple in the rear. No other company needs subsidies for their profits like Apple.

    Nexus 5 is $365 with shipping. iPhone 5S is $649 with shipping. Applying taxes on that price difference only magnifies the disparity. For the price of a current generation iPhone, a customer could purchase a new Nexus every 14 months.

    Now who here genuinely thinks that sales of the iPhone would be as high if customers weren't having the price disguised through carrier subsidies? At the very least, I expect that sales would be far more skewed towards cheaper iPhone models.

    The author is right. If subsidies start declining more, AAPL will get hurt. The stock is moved most by iPhone sales. And the largest market for those sales is the US. And those US sales will suffer is subsidies become less commonplace.

    That said, I don't see this happening in the immediate term. It'll take a few years for this to completely play out.

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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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