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Apple Just Broke T-Mobile's Heart

By Adam Levine-Weinberg - Sep 11, 2013 at 7:30PM

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T-Mobile had a lot to gain from the expected release of a cheap iPhone. But Apple broke its heart with a pricey $549 phone instead.

T-Mobile USA (TMUS -0.51%) had such high expectations for the upcoming launch of a "low-cost" iPhone. On Tuesday, Apple (AAPL 2.62%) held its long-awaited iPhone launch event, and in the process, dashed all of T-Mobile's hopes.

It's been common knowledge for weeks that Apple was going to launch two new iPhones this month. The iPhone 5S succeeds the iPhone 5 at the high end of Apple's lineup. The second phone -- the iPhone 5C -- is a cheaper model intended for more price-sensitive customers.

The iPhone 5S is Apple's new high-end phone (photo: Apple).

That sounded like great news for T-Mobile. Its new "un-carrier" strategy is designed to appeal especially to price-sensitive individuals. There's just one problem: The "cheaper" iPhone isn't cheap at all! In fact, it will be more expensive than Apple's entry-level phone today, carrying a hefty $549 price tag. In other words, there's no way the iPhone 5C will become the secret weapon T-Mobile was hoping for.

Winning the price-sensitive consumer
As part of its new "un-carrier" strategy, T-Mobile has moved to differentiate itself from rivals such as AT&T (T -0.50%) and Verizon (VZ 0.36%) by doing away with official subsidies for smartphone buyers. This approach allows T-Mobile to offer significantly lower prices for smartphone service, starting at $50 a month for unlimited voice, text, and data. (However, that plan allows only 500MB of data at 4G speeds; for access to more high-speed data, users must pay $10 to $20 extra.)

The trade-off is that T-Mobile subscribers don't get "free" -- or steeply discounted -- phones. For several years, Apple has priced its top-of-the-line smartphones at $649 with 16 GB of memory. T-Mobile customers can either pay that much upfront or opt to finance it over 24 months, with a lower down payment.

T-Mobile's plans are a great deal for a person who already has a GSM phone to use, like many current AT&T customers. T-Mobile's plans also benefit people who don't plan to upgrade every two years. Lastly, they're advantageous for users who want a cheaper smartphone and therefore wouldn't benefit as much from a traditional subsidy.

Hopes dashed
Many analysts expected that T-Mobile would gain a significant competitive advantage from the release of Apple's iPhone 5C. Not only would this be the first time that T-Mobile launched an iPhone at the same time as its competitors, but a cheaper iPhone would also appeal more to T-Mobile's target customer.

The iPhone 5C (photo: Apple).

A fully functional iPhone priced at $349 (unsubsidized) would be fairly close in price to the $199 upfront cost of a subsidized iPhone 5. In return for the slightly higher upfront cost, T-Mobile customers would have access to much cheaper no-contract plans.

Instead, the no-contract pricing for the iPhone 5C is $549, making traditional carrier subsidies much more desirable. T-Mobile will undoubtedly lure in some new customers nonetheless. However, the higher monthly payments associated with a $549 phone (an extra $8.33 per month compared with a $349 phone) will make for a much smaller pricing gap with AT&T and Verizon.

Uphill battle
Getting access to the iPhone has been a big tailwind for T-Mobile this year. A cheaper iPhone would have been an even bigger catalyst for T-Mobile, allowing it to further distance itself from industry leaders Verizon and AT&T in terms of pricing. But Apple rained on T-Mobile's parade by setting the iPhone 5C price high, at $549. Now, T-Mobile will have to continue slogging along to regain market share in the ultra-competitive wireless business.

Fool contributor Adam Levine-Weinberg owns shares of Apple and is long January 2015 $390 calls on Apple. The Motley Fool recommends 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.

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Stocks Mentioned

Apple Inc. Stock Quote
Apple Inc.
AAPL
$169.24 (2.62%) $4.32
T-Mobile US, Inc. Stock Quote
T-Mobile US, Inc.
TMUS
$144.84 (-0.51%) $0.74
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$44.84 (0.36%) $0.16
AT&T Inc. Stock Quote
AT&T Inc.
T
$18.01 (-0.50%) $0.09

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