Apple’s iPhone Could Get a Boost From the Death of Smartphone Subsidies

The U.S. wireless industry is in the midst of a tectonic shift: Brought on by T-Mobile's (NYSE: TMUS  ) aggressive "Un-carrier" strategy, smartphone subsidies are on the decline, and the once-dominant two-year contract model appears to be falling by the wayside.

Although this dramatic change could weigh on Apple's (NASDAQ: AAPL  ) iPhone, it also presents a tremendous opportunity and could ultimately give the business a boost.

T-Mobile shatters an industry standard
Originally, T-Mobile's decision to do away with smartphone subsidies was not well received: Analysts were skeptical and rival carriers doubted customers would be interested.

But T-Mobile proved its critics wrong when, late last year, the company emerged as the nation's fastest-growing wireless carrier. Perhaps it was better marketing or the addition of Apple's iPhone to its smartphone lineup, but the end of subsidies coincided with a massive influx of new T-Mobile subscribers. Although T-Mobile's customers don't receive smartphone subsidies, they get more freedom to end their service or upgrade to a new handset whenever they please.

Other carriers have now rolled out similar initiatives. T-Mobile's rivals have not completely done away with two-year contracts, but all of them now offer alternatives to those standard agreements.The various programs are increasingly popular with U.S. wireless subscribers: According to a report from Consumer Intelligence Research Partners, about 25% of smartphones sold in the first quarter were purchased using these no-contract plans; Macquarie expects that figure to approach 43% by the end of the year.

Many of those phones were iPhones.

The end of subsidies could mean fewer iPhones sold
During Apple's last conference call, CEO Tim Cook estimated that fewer than 25% of the iPhones Apple sold last quarter were subsidized. At first glance, this figure could be a bit deceiving, as subsidies are not common in other countries (with the exception of Japan). However, the United States is the iPhone's single largest market -- according to research firm NPD Group, the U.S. accounted for more than one-third of the 150 million iPhones Apple sold last year. Clearly, a shake-up in the way Americans purchase their iPhones could have a dramatic effect on its business.

That impact could be negative if existing smartphone owners keep their handsets for an extended period of time. Traditional subsidy models create regular upgrade cycles, in which existing iPhone owners are incentivized to buy a new model every two years. Changes to upgrade policies -- extending the length of time customers must wait to get a new phone -- have weighed on Apple's U.S. business in prior quarters.

But it could also give Apple a boost
Apple could also benefit since customers who previously would have been required to wait can (if they're on a contract-free plan) upgrade more quickly. Cook said this change will benefit Apple's business, stating the company believes it "plays to our customer base in a large way ... makes us incredibly bullish that customers on those plans would be very likely to upgrade when we announce a new product."

It may be too early to say how this shakes out. Subsidy-free plans may be taking over, but they haven't been around long enough to determine the effects on consumer behavior. This fall could prove a worthy test: If Apple's upcoming iPhone 6 smashes existing sales records, it would suggest that current iPhone 5s holders are taking advantage of their ability to upgrade more frequently.

Still, it shifts the onus back to Apple: Without two-year agreements, Apple will have to convince U.S. wireless customers that its newest iPhone is worth the upgrade.

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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 August 15, 2014, at 1:03 AM, ConstableOdo wrote:

    Apple is certainly the one company on the planet that would be able to finance its own products if they needed to. Apple has the money to do whatever is necessary to sell its own products without relying on anyone else. Apple introduced iPhone financial options in India and immediately sales surged. If Apple can do it in India, then they can do it in other countries. All this FUD about Apple's iPhone sales coming to a standstill due to lack of subsidies is pure nonsense being peddled by lying stock manipulators or Apple haters.

  • Report this Comment On August 15, 2014, at 10:34 AM, Fret04 wrote:

    I don't see how Apple would benefit from a loss of subsidized phones.

    T-Mobile already offers interest free financing if you don't pay the full price of a phone up front.

    What I see the problem being is that an 8 gig iPhone 4s still costs $450 off contract. I would like to know how many people are going to pay $450 for a phone with a 3.5 inch screen, $450 for a phone without LTE, and $450 for a phone with only 8 gigs of non-expandable storage.

    There are so many phones that give you so much more for less. But the reason the iPhone 4s still sells is because price doesn't matter when shopping for one, because it costs $0 when purchased subsidized. If people actually had to pay for the phone themselves, financed or not, they might actually look at a phone that doesn't have an Apple on the back of it.

    May Nokia Lumia 925 costs $99 off-contract. It has a 4.5 inch screen with 331 pixels per inch, which is more than the iPhone 4s at 3.5inches, has LTE, has 16 gig's of non-expandable storage (both have cloud storage), a better camera, and a more powerful processor. Hey, you can finance this $99 dollar phone too.\

    And their are similarly spec's Android phones that are much more affordable than the iPhone 4s too.

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