Apple's iPhone Upgrade Program Is Already Hurting AT&T and Verizon

Apple's unlocked iPhones give customers more freedom to switch carriers.

Adam Levy
Adam Levy
Nov 20, 2015 at 9:10AM
Technology and Telecom

Apple introduced the iPhone Upgrade Program at its September keynote. Image source: Apple.

When Apple (NASDAQ:AAPL) unveiled its plan to let customers pay for iPhones in installments, analysts predicted the more expensive wireless carriers -- AT&T (NYSE:T) and Verizon (NYSE:VZ) -- would feel the biggest impact. Apple's installment plan gives customers an unlocked iPhone that can be used on any carrier. With quarterly results in from every major wireless company in the States, it's pretty clear that analysts were correct in their assumptions.

T-Mobile (NASDAQ:TMUS) reported it had "more iPhones in the third quarter than at any point in our history." It thinks the iPhone Upgrade Program helped. Sprint (NYSE:S), meanwhile, posted its first postpaid phone net add positive quarter in over two years.

Let's take a look at why this is happening, and what, if anything, AT&T and Verizon can do to mitigate the impact.

Not going the easy route
Consumers who take the time to go to the Apple store and sign up for the iPhone Upgrade Program "have already decided not to go the easy route and just get an upgrade from the carrier," Kevin Smithen, an analyst with Macquarie Securities, was quoted as saying in a Bloomberg Business article. These people are more likely to shop around for the best value from wireless carriers. That could be any combination of price, service, and coverage, and it's increasingly found with the smaller carriers.

T-Mobile has led the way on providing the most it can to customers on price and free bonuses like in-home mini-cell towers, Wi-Fi routers, and unlimited music streaming. Throughout 2015, it has greatly improved its wireless coverage and has started deploying its 700 MHz low-band spectrum to improve service inside buildings.

Sprint is also doing its best to keep up with network improvements. It has tons of high-band spectrum left to deploy, and it's using that to make its network faster. Meanwhile, its prices are some of the lowest in the industry.

It's evident that phone subscribers are choosing T-Mobile and Sprint more and more. T-Mobile added 843,000 postpaid phones subscribers last quarter, and Sprint added 237,000. Verizon still added 430,000 postpaid phone subscribers -- a 6% year-over-year decline -- but AT&T lost 459,000 subscribers after adding 349,000 subscribers during the year-ago period. 

So, make it even easier
If customers are willing to go out of their way to buy their phone from Apple and buy their phone plan from a carrier, wireless carriers need to give customers more incentive to continue buying their phones from them instead of the manufacturer. Samsung -- the largest phone manufacturer in the world -- is expected to follow Apple into installment plans, according to wireless analyst Chetan Sharma, so the time to act is now.

Making it easier to buy a phone from a carrier may come in several forms. For example, more flexible upgrade options, lower pricing, or simplifying customer bills could all entice customers to choose a carrier's installment plan over Apple's.

Sprint and T-Mobile have already responded to the iPhone Upgrade Program with lower-priced options. Subscribers can lease a phone for a period of time for significantly less than the monthly payment Apple offers, and they have the option to buy the phone after the lease. T-Mobile's total price over 18 months even comes out below Apple's retail price.

T-Mobile also has a program that lets customers upgrade their phone up to three times per year, giving them assurance that they won't get stuck with a phone they don't like and can always upgrade to the newest thing. Verizon, meanwhile, changed its upgrade policy from 18 months to 12 months in response to the iPhone Upgrade Program, giving customers the option to get a new iPhone every year.

But part of the beauty of Apple's iPhone Upgrade Program is its simplicity. You can only buy an iPhone, and you can choose to either upgrade early or wait an extra year to pay off the phone. Carriers will push customers to upgrade more often and offer tons of options. Customers can be overwhelmed by choice.

Combating the impact of Apple's iPhone Upgrade Program directly is a tough task to take on. As a result, the low-cost value carriers are likely to see the biggest benefit from Apple's installment plans as customers are now free to select any carrier they choose.