Apple Stock: The Surprising Upside of iPhone Installment Plans

The theory was that installment plans would make consumers more price conscious, which could hurt iPhone sales in the process. The reality is that the exact opposite is happening in the U.S.

Jun 15, 2014 at 8:00AM

Hero

iPhone 5s. Source: Apple.

The domestic smartphone industry is undergoing significant structural changes as we speak. One of the more meaningful shifts is a move away from the subsidy model that carriers have used for over a decade toward financing and installment plans. T-Mobile is very much responsible for the current direction of the industry. How do installment plans affect Apple's (NASDAQ:AAPL) iPhone prospects?

In theory
Apple's premium pricing for the iPhone is masked by subsidies as carriers absorb the extra cost. A $650 iPhone might cost the same as a $500 Android phone after subsidies. Apple devices tend to generate more data usage (and fees), which the Mac maker undoubtedly uses in subsidy negotiations.

With the move toward financing plans, the theory was that revealing the full retail price would make consumers more price-sensitive, even though that would be spread over 24 months.

In reality
According to new survey results released by Consumer Intelligence Research Partners, or CIRP, the exact opposite is happening. The figures are based on a survey of 1,500 respondents between July 2013 and March 2014. CIRP finds a considerable shift toward higher-priced iPhones when purchased under interest-free financing plans. The flagship iPhone 5s grabs 73% of financed iPhone sales, compared with 61% of subsidized iPhone sales.

Cirp

Source: Consumer Intelligence Research Partners.

Under the subsidy model, Apple gets the same carrier subsidy regardless of which model consumers buy. That means moving up to a pricier model translates directly into an upfront out-of-pocket cost to the consumer.

Model

Subsidized Price

iPhone 4s

Free

iPhone 5

$99

iPhone 5s

$199

The appeal of installment plans is that the price difference also gets spread over 24 months, which encourages buyers to splurge for the latest and greatest.

Premium

Spread Over 24 months

$99

$4.13 per month

$199

$8.29 per month

Paying $8 per month for two years for the best model sure beats $200 upfront. Since the monthly difference is negligible, the increased price sensitivity theory doesn't play out.

Bringing it home
Last quarter, Apple posted a surprisingly strong gross margin of 39.3%, above the high end of its guidance range (38%). The company cited a favorable product mix, among other factors, that helped profitability. iPhone average selling prices did drop precipitously, but that was primarily due to the iPhone 4s's outperformance in emerging markets. CIRP's findings apply only within the U.S., and it estimates that Apple's domestic weighted average retail price for financed iPhones was $27 higher than subsidized models.

Domestic carriers used to report iPhone activations, which served as a proxy for Apple's domestic sales when aggregated. Activations don't equal sales, but over time the difference averages out around 1%. The last time that the biggest three domestic carriers provided this data was Q1 2013, and domestic activations comprised 28% of total iPhone unit sales. T-Mobile became a carrier the following quarter.

The U.S. should be approximately 30% of Apple's iPhone business and could even be trending lower as Apple grows in emerging markets. Additionally, Apple is enjoying tailwinds from the recent carrier additions of China Mobile and NTT DoCoMo.

Apple has been pursuing a lot of initiatives in emerging markets to make iPhones more affordable, but in those cases consumers are just trying to buy any iPhone at all. Because of lower income levels, the 5s is still cost prohibitive in many of these markets, hence declining global average sales prices. CIRP's findings are good news for Apple's domestic business, but at this point two-thirds of Apple's revenue comes from abroad, which is why Apple is rightly focusing its efforts there.

Leaked: Apple's next smart device (warning -- it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee that its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are even claiming that its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts that 485 million of these devices will be sold per year. But one small company makes this gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and to see Apple's newest smart gizmo, just click here!

Evan Niu, CFA, owns shares of Apple. The Motley Fool recommends Apple and China Mobile and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers