Source: Apple Keynote.
Wireless carriers are usually very excited this time of year -- the time of year when Apple (AAPL 3.40%) releases its new iPhones. But Apple's announcement this year included a new item that has carriers on the defense.
Apple introduced the iPhone Upgrade Program, which mimics carriers' equipment installment plans. Equipment installment plans, or EIPs, were introduced a couple of years ago to provide customers more transparency into their phone bills. They also have the added benefit of convincing some users to upgrade their phones more often, reducing the impact of smartphone subsidies on carriers' wallets.
So why does Apple's own version of EIPs represent such a threat to carriers?
Keeping customers in the ecosystem
The iPhone Upgrade Program is a response to the carriers eschewing smartphone subsidies in favor of equipment installment plans. Verizon (VZ +2.25%), the last holdout to EIPs, recently announced that it wouldn't offer new customers a subsidy on their smartphones. AT&T (T +1.91%), T-Mobile (TMUS +2.38%), and Sprint (S +0.00%) all saw the majority of their smartphone activations via installment plans. This makes Apple's $199 price tag for the new iPhone feel disingenuous.
Apple's solution not only provides a nice low price tag, it also makes business sense. It has a shorter upgrade period compared to carrier plans, encouraging customers to upgrade phones more frequently. Additionally, it bundles high-margin AppleCare+ insurance -- a feature wireless carriers would obviously rather sell their customers.
But the biggest benefit to Apple may be that customers using its iPhone Upgrade Program will only be able to upgrade to a new iPhone. That keeps them in the Apple ecosystem until they decide to either wait longer to pay off their phones, or take the financial hit by paying it off in one lump sum.
Carriers have been using that same mechanism with EIPs to keep customers on their respective networks. Every time a user upgrades early, it extends the expected lifespan of that customer. That's why Apple's entrance into the market, with its unlocked iPhones, is troubling to the wireless carriers.
T-Mobile and Sprint respond
T-Mobile responded to Apple's entry into EIPs with a promotional offer. It will lease a new iPhone 6s to subscribers for $20 per month for 18 months and offer them the phone for $164 at the end of the lease. That puts the total cost of the brand-new iPhone at just $524. That price drops even further if you trade in an existing phone.
Sprint is offering a similar leasing program, which will charge customers $22 per month for 20 months, and then offer them the option of buying the phone at the end of the lease. If you trade in an existing phone, you can get the new iPhone for just $15 per month.
Both of these are clearly ploys to get people to sign up to their networks when purchasing a new iPhone. AT&T and Verizon haven't offered anything beyond their standard installment plans for the new iPhones, and with stronger networks than their smaller competitors consumers shouldn't expect them to.
Other considerations of Apple's plan
There is one benefit to carriers when Apple enters the market. With Apple taking over the iPhone financing for customers, operations become more streamlined for the carriers. They don't have to finance the phones themselves, which can have an impact on cash flow, and they don't have to securitize their accounts receivables and find a bank to sell them to. As a result, investors can expect cash flow to more closely align with revenue if Apple's iPhone Upgrade Plan takes off.
Another consideration, however, is the possibility that the iPhone Upgrade Program foretells Apple's entry into the wireless service market as an MVNO. This was rumored several months ago, and Apple flat out denied those claims. But it wouldn't be the first major tech company to enter the market. If it sees success financing iPhones, Apple may be inclined to offer a simple MVNO plan. Any carrier that doesn't wholesale wireless data to Apple will miss out on at least mitigating the impact an Apple MVNO would have on the industry.
All in all, the iPhone Upgrade Program represents a significant threat to wireless carriers -- which are already facing significant competitive pressures. One more competitor -- in Apple -- only makes it more likely that margins will compress further.
