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

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Forget Google and Samsung -- the two companies most threatening to Apple's (NASDAQ: AAPL  ) business are AT&T (NYSE: T  ) and T-Mobile (NYSE: 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.

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Read/Post Comments (7) | Recommend This Article (0)

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 February 05, 2014, at 12:29 PM, ranchrfl wrote:

    SAM, SAM, SAM,

    Subsidy equals Finance plan. No more no less.

    My T-Mobile family plan with unlimited data, unlimited TXT and Talk and two new Apple 5s phones being paid off at $20 each per month is the same $175 at ATT's plan without a phone and I get unlimited TXT in Europe, Unlimited land line calls to Europe and calls when traveling in UK cheaper than having a pay-as-you-go UK carrier plan.

    Please review and understand what the facts are and rewrite the story.

  • Report this Comment On February 05, 2014, at 12:32 PM, ranchrfl wrote:

    Sorry for the typo "same $175 at ATT's plan without a phone" should have been same $175 "AS" ATT's plan without a phone.

  • Report this Comment On February 05, 2014, at 12:41 PM, ipinsao wrote:

    I agree. Now that the prices for the phones are much visible to the customer, they would actually pick a cheaper phone especially if it affects the overall bill. I was able to buy 4 smart phones in cash and the total cost was about the same as 1 IPhone which is ridiculous. Now I only pay $120+ tax with TMobile.

  • Report this Comment On February 05, 2014, at 1:57 PM, kerryog wrote:

    Actually Subsidy equals opaque financing plan where the buyer doesn't know the cost of the device or the amount of the monthly payment. Also there is no payment term, the subsidy cost continues to be charged even after the device has been paid off, even if no new device is purchased. Its a great financing model for the carriers, but one that wouldn't be tolerated in any other industry. Imagine agreeing to pay an unspecified amount forever for a new car.

  • Report this Comment On February 05, 2014, at 2:03 PM, Mathman6577 wrote:

    I don't think Apple is that worried (especially from T-Mobile). The market will adapt to the new normal. I'd (and most high-end users) rather pay $700 for an iPhone then $100 or $200 for a junky Android device (note that there is a reason it only costs $200).

  • Report this Comment On February 05, 2014, at 3:28 PM, kerryog wrote:

    I think the point is that the market for $700 phones is much smaller than the market for $100 phones. Many people can't afford the high end phones and without subsidies, the cost difference is exposed to the customer

  • Report this Comment On February 06, 2014, at 10:31 AM, usmsbow wrote:

    I'm an anecdote for this article. I used to have a (subsidized) iPhone with Sprint. Contract ended a week ago, I switched to t-mobile. Got a Nexus 5 because it was $300 less. Have to say it is a big step up from my iPhone 4s. While I might have liked the iPhone 5s more than my Nexus 5, I doubt it is THAT much better to justify the extra bucks.

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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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