Apple's Biggest Threats Are AT&T and T-Mobile

AT&T and T-Mobile are threatening Apple's iPhone business by doing away with smartphone subsidies.

Feb 5, 2014 at 12:00PM

Forget Google and Samsung -- the two companies most threatening to Apple's (NASDAQ:AAPL) business are AT&T (NYSE:T) and T-Mobile (NASDAQ:TMUS). While they obviously aren't direct competitors, AT&T and T-Mobile are increasingly pushing the U.S. wireless industry away from subsidies, threatening Apple's business in the process.

Apple's dominance of the U.S. smartphone market has largely been a byproduct of generous carrier subsidies. If these subsidies fall by the wayside, it will be increasingly difficult for Apple to maintain its current position.

Subsidies distort the market
As I've noted before, subsidies heavily distort the handset market by discouraging buyers from price shopping. Under AT&T's standard two-year contract model, subscribers' monthly bills are fixed -- no matter which handset they choose, they'll pay the same monthly rate.

This heavily incentivizes buyers to select higher-end, more expensive phones like Apple's iPhone. Although they'll have to pay a $200 down payment (which they wouldn't have to do if they were selecting a cheaper Android model), over the course of that contract, the down payment is relatively insignificant.

They're also heavily encouraged to take advantage of AT&T's subsidies by buying another Apple product every two years. They might as well -- their monthly bill stays the same even if it's been more than two years since they got a new phone.

AT&T and T-Mobile are changing the model
But T-Mobile, and increasingly AT&T, are rapidly destroying the model. Earlier this week, AT&T unveiled a radical new policy -- subscribers can get a family plan with up to five lines and 10GB of shared data for just $175 per month; a steep discount from its normal family plan pricing.

But there's a catch -- no subsidies. Families that opt for this plan will have to buy their phones outright, carry over an old phone, or pay for a new phone in monthly installments.

All three options are bad news for Apple. If a subscriber buys a new handset outright, they may find it far more desirable to purchase the $350 Nexus 5 or $330 Moto X rather instead of the (far more expensive) $650 iPhone 5s. Even if they pay for it in monthly installments, they're still incentivized to choose a cheaper phone, as the payments on a cheaper handset, obviously, are less than a more expensive one. And if they keep their old iPhone, when they would've otherwise upgraded to a new model, Apple sells one less handset.

T-Mobile sells fewer iPhones than its competitors
When T-Mobile announced it would do away with subsidies, it was met with skepticism. Consumers, it was widely reasoned, wanted subsidies -- they wanted Apple's iPhones, but they weren't willing to pay for them.

But clearly that isn't the case. T-Mobile, spurned on by its lack of subsidies, has become the nation's fastest growing wireless carrier. And though it's adding subscribers at a rapid pace, they aren't buying as many iPhones -- T-Mobile has sold far fewer of Apple's handsets than its rival carriers have.

As these plans continue to grow in popularity, it will be interesting to see if Apple can maintain its U.S. market share. Intuitively, it shouldn't be able to, as Apple takes just a token share of the market where smartphone subsidies are rare or unheard of. Even in Western Europe, where consumers are far more wealthy than developing economies, Apple's market share much is less than in the United States.

For now, the majority of subscribers at major U.S. carriers are still on subsidy-supported plans, but this is one trend Apple shareholders should watch closely.

A better investment than Apple? Get our top stock for 2014
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report, "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers