T-Mobile (TMUS 0.36%) is the nation's fastest-growing carrier. Last month, it added 1 million net new customers and 648,000 new subscribers. The quarter before that, it added 700,000, rapidly outpacing larger rivals AT&T and Verizon Wireless (VZ 0.80%).
But there's something interesting about T-Mobile's new subscribers -- they don't seem to care for Apple's (AAPL 1.45%) iPhone. Not that they don't want it -- T-Mobile sold about 900,000 iPhones last quarter -- but that, proportionately, they aren't buying as many of them. Last quarter, just 21% of the smartphones T-Mobile sold were iPhones; in comparison, a whopping 51% of Verizon's smartphone activations were Apple-made handsets.
What's with the discrepancy? A few percentage points may have been chalked up to random chance, but a difference of such magnitude speaks to some underlying force at play. T-Mobile's lack of subsidies stands as a major contributing factor.
T-Mobile's "un-carrier" initiatives
T-Mobile's recent growth has largely been the result of its new "un-carrier" policies, the most significant of which has been the cessation of two-year contracts. Unlike other carriers, T-Mobile's subscribers pay month to month, and there are no early-termination fees.
But with no contracts, there are no phone subsidies, either. When buying a phone from T-Mobile, customers must pay for the phone themselves -- either totally up front or by making a down payment (depending on the model), and then paying the rest in monthly installments.
This means that, to T-Mobile subscribers, the price of the handset they're purchasing is far more significant -- cheaper phones, therefore, become much more alluring. Nokia's 521, a phone that costs just $126, is listed as a top seller on T-Mobile's website. To get that phone, T-Mobile subscribers can either buy it outright or pay $5.25 per month for two years; in contrast, Apple's iPhone 5s can either be purchased for $649 or with a down payment of $150 and monthly installments of $21 for two years.
Phone subsidies make customers less price sensitive
The net effect of T-Mobile's new policies is to make consumers far more sensitive to the cost of their handsets: The price of T-Mobile's monthly service can very significantly based on which phone the subscriber chooses.
In contrast, subscribers on other carriers are likely to be far less sensitive to the cost of their phones -- the monthly bill is largely the same no matter which handset they use. Verizon Wireless offers cheaper phones, but there is little reason to purchase one. The Pantech Marauder, a phone running Google's Android, costs $340 unlocked. Subscribers signing a two-year agreement with Verizon get it for free, but customers would do themselves a great disservice in purchasing it.
Getting an iPhone 5s costs just $200 more because Verizon subsidizes the phone so generously. But compared to Pantech's phone, Apple's handset is well worth the extra $200, especially because contract signers will be forced to use it for two years. CNet gave Pantech's phone a rating of 7.0 (out of 10) lamenting its laggy processor; in contrast, it gave the iPhone 5s an 8.8, calling it the "fastest and most advanced Apple smartphone to date."
But once you get your new phone, you'll pay the same for monthly service -- for a plan with 2GB of data, Verizon charges about $100 per month. Users of Apple's iPhone 5s or Pantech's Marauder will end up paying the same monthly fee.
T-Mobile's growth is an area of concern for Apple
While Apple's iPhone has stayed strong in the U.S. (accounting for about 40% of smartphone sales), it's been sidelined in most other major markets. Worldwide, Apple's share of the smartphone is now down to about 13%.
The difference between the U.S. smartphone market and other countries largely comes down to subsidies -- Apple depends on carriers footing the majority of the bill for its expensive phones. That works exceptionally well when the carrier is Verizon, where flat monthly bills incentivize subscribers to get the best-quality phones possible, regardless of the price.
But not so much when the carrier no longer offers subsidies. T-Mobile subscribers can see vast differences in their monthly bill depending on their choice of handset, making them less likely to purchase an expensive iPhone from Apple.
Certainly, T-Mobile is just one carrier, and one of the smaller ones at that. But its rapid growth should be watched closely, particularly if other carriers move to adopt T-Mobile's policy.
