Apple's (NASDAQ:AAPL) iPhone 6 and iPhone 6 Plus iterations have become an instant hit, propelling the company to a $700-billion valuation amid the highest quarterly net income for any publicly traded company ever. All told, the company sold 74.5 million iPhones -- the vast majority being the newest iterations -- or nearly 9.5 iPhones every second during the company's first fiscal quarter.
In the United States, Apple has a partner in both Verizon (NYSE:VZ) and AT&T (NYSE:T). If you're a potential wireless subscriber, you know these carriers offer generous device subsidies -- for example, you can buy the iPhone 6 and iPhone 6 Plus 16GB versions for $199 and $299, respectively, whereas the units cost $649 and $749 off contract.
Verizon and AT&T aren't doing this out of kindness -- the device subsidy is a carrot to induce you to sign a two-year contract. Essentially, the company makes back the $450 during the next two years by higher wireless-plan costs. And it appears the companies are choosing to monetize data rather than talk or text, essentially treating the latter two as loss leaders. If the newest Citrix survey is correct, both companies should increase the device subsidy on the iPhone 6 Plus in order to reward shareholders.
Carriers want to monetize data -- the iPhone 6 Plus creates demand for it
According to marketing firm Citrix, iPhone 6 Plus owners use roughly twice the amount of data as iPhone 6 owners do on a monthly basis. The company offers an explanation: It believes that those with an iPhone 6 Plus treat the device more as a tablet rather than just a phone. And the streaming-movie viewing, gaming, and browsing are creating huge demand for billable data.
To these carriers that bill by the gigabyte, a shift to the iPhone 6 Plus would suggest higher data revenue and profit for the company and its shareholders. Using a term mostly reserved for companies that sell products, this would be akin to a "favorable product mix" for these two wireless giants, as an iPhone 6 Plus subscriber would pay more in data plans and overages. In short, Verizon and AT&T would rather subscribers choose the iPhone 6 Plus rather than the iPhone 6; therefore, they should encourage future subscribers to pick the iPhone 6 Plus by narrowing out-of-pocket costs between the two.
A $50 price cut would be cheaper than Verizon's last move
For those who worry that Verizon and AT&T would be giving up too much to encourage users to upgrade to a more favorable product, think again. If you had been following these companies during the last few months, you would have noticed they were reducing the price users pay for data. Just this month, Verizon cut its More Everything shared-data plans by as much as $10 monthly to match an earlier AT&T price cut.
While the data-plan price cut is already done, making it a sunk cost in terms of direct comparison, $50 every two years is only an additional $2.08 per month. In addition, an increased device subsidy for one model has the benefit of not being as "sticky" -- read: easier to rescind -- as a lowered data bill. Not only that, sweetening the pot for the iPhone 6 Plus also has the benefit of subscriber poaching if the other wireless subscribers fail to match the price cut.
In the end, a one-time $50 iPhone 6 Plus subsidy increase should pay for itself in the long run. Unfortunately, it seems these companies are choosing to de-emphasize device subsidies. I think that's a mistake for their long-term plans of monetizing data. Devices that lead to more consumption of data should be further subsidized; they should not be made a disincentive.
Jamal Carnette owns shares of Apple, AT&T, and Verizon Communications. The Motley Fool recommends Apple and Verizon Communications. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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