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Samsung May Take a Page From Apple

By Jamal Carnette, CFA - Sep 24, 2015 at 1:00PM

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If the reports are true, Samsung's newest plan to follow Apple's lead in phone leasing makes sense.

Samsung may offer phone financing options for its Galaxy S6 and Galaxy S6 Edge units. Image source: Flickr user Karlis Dambrans.

In the high-end smartphone market, Apple (AAPL -0.13%) and Samsung (NASDAQOTH: SSNLF) have been battling on multiple fronts. From a marketing standpoint, both companies have engaged in subtle and not-so-subtle comparisons, with Samsung recently becoming quite aggressive with its perceived shortcomings in Apple's iPhone line. The animosity has extended to the courtroom, with Apple recently winning a victory against Samsung for patent infringement in regards to its "slide to unlock" feature Samsung copied in prior-gen models.

Apparently, that hasn't stopped Samsung from following Apple's lead in other facets of their business. According to a new report from Forbes, Samsung is planning to launch a direct leasing plan in the upcoming months. And if that sounds incredibly familiar, that's because a direct-to-consumer leasing model was announced by Apple at its September event. It seems Samsung is looking to copy Apple's iPhone Upgrade plan.

The end of the device subsidy could be a good thing for Apple and Samsung
To be fair to Samsung, this move appears to be less of an attempt to blatantly copy Apple and more of an attempt to take back power from mobile carriers. After years of domestic carriers subsidizing high-end phones, only to later recoup those costs with higher service fees, most carriers have cut out device subsidies in favor of offering installment plans. As of this current time, of the four-largest U.S. carriers, only AT&T still provides device subsidies, as Sprint and Verizon joined T-Mobile in phone financing plans with no price support.

There are two theories in regards to how the transition away from the device-subsidy model will effect high-end phone sales. The bullish, or at least the most-bullish, argument focuses on the fact that carriers were never really offering subsides in the first place, merely concealing the costs with higher monthly service fees.

This line of thought is bolstered by the argument that early device subsidy abandoner T-Mobile has among the lowest monthly bills, even when high-end device costs are included. Furthermore, many of these new plans are leasing options that could potentially increase upgrade cycles as users are allowed to upgrade to the latest-gen phones without penalties. If the leasing option becomes the primary way U.S. consumers acquire smartphones, Apple and Samsung could benefit from this shift.

However, it seems Apple and Samsung aren't taking any chances
The opposite side, of course, is any subsidy -- or perceived subsidy -- increases sales, and the loss of said subsidy will be negative for smartphone sales. Outside of phone leasing, the options to buy a smartphone with carriers are either to lease the unit and pay in perpetuity for devices, to finance the phone over two years, or to pay full cost for the device. Of the latter two choices, bears note the potential for slower upgrade cycles as subscribers pay off their phones and become accustomed to lower monthly bills or have to pay upward of $700 at once to have the newest handset.

It seems Apple -- and now Samsung -- aren't waiting for this hypothetical debate to become a reality and are looking to limit the power of carriers in the buying process, as offering a competing distribution channel seeks to commoditize carriers. Although we don't quite know the specifics of Samsung's program, Apple combines both the functions of a lease, where you can upgrade in perpetuity, or a two-year installment option in which the user owns the phone outright at the end of that period.

Although it should be noted the costs for the latter are more expensive than carriers, the hybrid lease/installment option offers maximum flexibility and has the benefit of forcing carriers to continue to offer solid leasing and financing options as well. For Apple and Samsung to offer this option is simply smart business on a multitude of levels, and investors and potential customers should welcome these financing options.

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