Apple (Nasdaq: AAPL) is making it hard not to own an iPhone these days, recently lowering the bar to ownership by allowing a pair of carriers to offer the current-generation models through prepaid plans. The carriers -- Sprint Nextel's (NYSE: S) Virgin Mobile and Leap Wireless' Cricket -- will sell both the iPhone 4 and the 4S at their retail prices without requiring a contract. This will obviously benefit another set of customers who want to own iPhones, but how about the companies involved with the products?
Cool on a budget
It seems pretty obvious that Apple, as usual, will take home the lion's share of the prizes. An overall pricing point, between contracts and the price of the phone itself, for the increasingly crowded Club iPhone will undoubtedly sell many more of the devices. The standard two-year contract in force at all the major iPhone selling carriers -- not only Sprint but also AT&T (NYSE: T) and Verizon (NYSE: VZ) -- is often the deal-breaker for those who would otherwise embrace the trendy phone.
According to some whispers on the market, those shut-out customers aren't the only ones who are grumbling. Apparently, Apple hasn't been all that pleased with the major carriers and their expensive and seemingly ever-increasing charges for providing iPhone service, not to mention the handcuffs of those mandatory two-year contracts. Earlier this year, for instance, AT&T essentially lifted its prices for data usage (a key reason people buy the iPhone in the first place), from a minimum of $15 for 200 MB to $20 for 300 MB, respectively.
Verizon, which loudly and publicly trumpeted its unlimited data plans when it first started selling the phones, wasn't so noisy when it started to shift its pricing according to usage. These days, eating up to 2 GB of data per month costs a Verizon customer $30, 5 GB runs $50, and 10 GB lands on the bill at $80. So much for "unlimited."
Only two at the dance
This pair of big guys can get away with these price creeps because they're effectively the only power players on the market. iPhone-come-lately little guy Sprint sold a bit over 1.5 million iPhones in its most recent quarter; by contrast, AT&T activated 4.3 million and Verizon 3.2 million in the same period -- and these numbers were below expectations. Even the unlimited data plan offered by Sprint hasn't resulted in significantly closing the gap between it and its larger brethren.
Meanwhile, AT&T's former acquisition target, T-Mobile -- still and probably forever a unit of Germany's Deutsche Telekom (OTC: DTEGY.PK) -- doesn't carry the iPhone, and it seems unlikely to do so anytime in the near future. Since it's the one product cellular customers want, they're running away from the company. In the fourth quarter of last year, for instance, T-Mobile lost more than 700,000 wireless contract subscribers. Happily absorbing the defectors was AT&T, which added around the same number, and Verizon, which took on 1.2 million.
So from Apple's standpoint, having rival carriers offer prepaid options can potentially light a strong fire under the two incumbents. Yes, the non-subsidized price of $649 that Sprint/Virgin Mobile will charge for the iPhone 4S will cause sticker swoon and second thoughts among potential customers. Once they get past the slight heart attack and their conscience, however, the base $35 per month for service (which includes 300 minutes of talk time plus unlimited data and texting) will be a powerful inducement to going non-contract -- particularly when compared with those unloved two-year contracts, which start at around $90.
Turn a negative into a positive
The major carriers aren't going to be happy about this, which at first thought is understandable. Even relatively affluent customers who can afford to be on contract will seriously consider the new prepaid options -- after all, when totaled over a two-year period they're notably cheaper (by around $270 vs. AT&T's contract deal, and $510 against both parent Sprint's and Verizon's). Defections and greatly reduced iPhone customer adds loom for the big boys if they don't start shaving a few of those costs and/or offering deals for existing clientele.
That is, unless they successfully lobby the Kings of Cupertino to be allowed to go prepaid with the 4 and the 4S. The very great advantage of prepaid, besides the obvious attraction for new customers, is that it entirely cuts out the subsidy the carrier has to fork over to win a contract client.
That would provide some much-needed relief to the contract carriers. Using AT&T as an example, the company prices the 16GB iPhone 4S at $199 for its contractees, which is quite a bit below the typical $649 retail price of the device. That's around $450 or so in cash flow and immediate revenue it has to sacrifice to sign up that customer. This is one big reason the company's net margins have been notably thinner (or negative, in some reporting periods) since it started offering Apple phones. It's also a factor in its anemic top-line growth over the past few quarters.
Victories all around
This is one of those pleasant occurrences where the customer clearly wins. With more and better choice on the market, the sleekest and most up-to-date iPhones are now within reach of those of even modest means. They're the immediate beneficiaries of this development, as is Apple, which will be delighted to ship millions more of its best-selling product.
As for the carriers, loss-making Sprint will greatly appreciate the new customers it'll gain and the resultant lightening of its subsidy burden. AT&T and Verizon are going to fight and grumble and will probably be forced to offer strategic discounts, at least at first. If they play this the right way and lobby for prepaid, however, they can profit from this move, too. The wireless game doesn't always have to have a loser.
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