AT&T (NYSE:T) has gone to war with T-Mobile (NASDAQ:TMUS). On Friday, AT&T announced that it will give T-Mobile subscribers up to $450 in promotional credit for each line they bring over from T-Mobile to AT&T.
The move signals a shift in the wireless industry, as carriers compete to steal subscribers from each other. It also suggests a new standard in the way smartphones are purchased -- with potentially devastating consequences for both Apple (NASDAQ:AAPL) and Samsung (NASDAQOTH:SSNLF).
The end of subsidies in the U.S.
T-Mobile was able to attract the attention of AT&T with a number of major revisions it made to its business model in 2013 (collectively referred to as its "un-carrier" initiatives). Most notably, T-Mobile ceased offering standard two-year contracts and the smartphone subsidies that came with them.
Now, T-Mobile subscribers pay only for their service on a month-to-month basis. If they need a new handset, they can purchase one outright or pay for it in monthly installments, but T-Mobile doesn't cover any part of the handset's cost. In contrast, wireless providers like AT&T charge more monthly but attract subscribers by essentially buying them a new smartphone every two years.
In December, AT&T followed T-Mobile's business strategy, announcing a new plan -- the "Mobile Share Value" plan -- that would, like T-Mobile's, allow subscribers to significantly reduce their monthly bill by forgoing subsidies. AT&T continues to offer two-year contracts, but perhaps not for much longer -- AT&T's CEO recently hinted that smartphone subsidies will soon be coming to an end.
AT&T's offer is all the more notable because, to get the full $450 credit, T-Mobile subscribers must sign up for a plan that doesn't include subsidies.
How Apple could suffer
It's overwhelmingly clear that Apple's iPhone business depends on subsidies. In markets where subsidies are common and generous (like the U.S. and Japan) Apple's iPhone takes a sizable chunk of the market; where they are uncommon, Apple has only a minority position.
If AT&T drops subsidies entirely, and other carriers follow, it stands to reason that Apple will sell far fewer iPhones. Many of Apple's customers will continue to purchase $649 iPhones, but more could opt for cheaper Android handsets. If you're not getting a subsidy, Google's $350 Nexus 5 or Motorola's $400 Moto X look far more attractive. Though the phones might not be as good as Apple's iPhone, they've both received stellar reviews, and many consumers could find them to be "good enough."
Even if iPhone buyers are hooked on Apple's handsets, they probably won't upgrade to newer models as often as they have been. As it stands, AT&T subscribers on a two-year contract don't see their bills go down when their phones are paid off. Since you're really not saving any money by keeping an old handset, upgrading to a newer model every two years is a no-brainer.
However, if you're a T-Mobile subscriber or are on AT&T's subsidy-free plan, your bill drops when your phone is paid off. If the new iPhone doesn't impress you, you can keep an extra $50 in your pocket every month by holding on to your old phone. If these plans become the standard, smartphone upgrade cycles should lengthen significantly.
Samsung will also be pressured
Of course, it isn't just Apple that stands to lose. Samsung, also, could be on the hook. In fact, back in June, ABI Research reported that carriers subsidize Samsung phones more than Apple-made handsets. Unlike Apple, Samsung allows U.S. carriers to install their bloatware apps on its phone, perhaps explaining their generosity.
Samsung is a more diversified business than Apple, both in the products it makes and the price points it targets. Still, about two-thirds of the profit Samsung brings in comes from its mobile devices, and despite offering cheaply made phones at bargain prices (something Apple has resisted), the majority of Samsung's mobile profit comes from its expensive, high-margin flagship Galaxy S and Galaxy Note devices.
Analysts at Berenberg Bank (via Business Insider) noted that Samsung's portfolio of high-end devices basically subsidizes its cheaper handsets -- as one might imagine, there isn't much profit to be squeezed out a smartphone that retails for $100 to $200.
The $350 Nexus 5 is widely believed to be sold at a loss, and it's unlikely that Motorola is making much money on the $400 Moto X. As a search giant, Google may be able to afford to subsidize its hardware, but Samsung isn't built to do so.
The end of smartphone subsidies could be the end of iPhone and Galaxy dominance
AT&T's announcement on Friday was a harbinger of things to come: U.S. wireless carriers are moving away from subsidies. How long that takes remains unknown, but investors in both Apple and Samsung should keep a close eye on this unfolding trend.
Both companies have built their recent successes on carriers willingness to foot the bill for their subscribers' handsets. As that goes away, both companies could be pressured.