Forget Google and Samsung -- the two companies most threatening to Apple's (NASDAQ:AAPL) business are AT&T (NYSE:T) and T-Mobile (NASDAQ: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 still incentivized to choose a cheaper phone, as the payments on a cheaper handset, obviously, are less than a more expensive one. And if they keep their old iPhone, when they would've otherwise upgraded to a new model, Apple sells one less handset.
T-Mobile sells fewer iPhones than its competitors
When T-Mobile announced it would do away with subsidies, it was met with skepticism. Consumers, it was widely reasoned, wanted subsidies -- they wanted Apple's iPhones, but they weren't willing to pay for them.
But clearly that isn't the case. T-Mobile, spurned on by its lack of subsidies, has become the nation's fastest growing wireless carrier. And though it's adding subscribers at a rapid pace, they aren't buying as many iPhones -- T-Mobile has sold far fewer of Apple's handsets than its rival carriers have.
As these plans continue to grow in popularity, it will be interesting to see if Apple can maintain its U.S. market share. Intuitively, it shouldn't be able to, as Apple takes just a token share of the market where smartphone subsidies are rare or unheard of. Even in Western Europe, where consumers are far more wealthy than developing economies, Apple's market share much is less than in the United States.
For now, the majority of subscribers at major U.S. carriers are still on subsidy-supported plans, but this is one trend Apple shareholders should watch closely.