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

Sam Mattera
February 5, 2014

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 stil