New York - Apple’s decision to finance and lease iPhones to consumers could accelerate price competition and step up margin pressure at the nation’s wireless carriers.
Apple users can now buy an iPhone 6s starting at $27 a month over two years, rivalling similar offers at each of the four nationwide carriers. Through an “iPhone Upgrade Programme”, they could get the same phone - and upgrade to a new one once a year - for monthly payments starting at $32.
If iPhone users opt for Apple’s plans, they might be more inclined to ditch their provider more frequently, taking their phones with them. And carriers would face even more pressure to compete on price and service.
“The plan will lower barriers to switching for wireless subscribers and boost industry churn,” Jonathan Chaplin, an analyst at New Street Research, wrote in a note. “This should accelerate the rate of share gains for T-Mobile US, at the expense of the incumbents.”
T-Mobile promo
In March 2013, T-Mobile became the first carrier to use financing combined with lower-priced service plans. The offer took hold with consumers as T-Mobile sacrificed profit to gain market share. Larger rivals have been forced to respond and industry margins have been squeezed.
In response to Apple’s announcement on Wednesday, T-Mobile introduced an iPhone leasing programme for $20 a month over 18 months, with the option to upgrade the phone “whenever you want”. The promotion starts on Saturday at midnight on iPhone pre-orders.
“We love this,” Mike Sievert, T-Mobile’s chief operating officer, wrote in an emailed statement regarding Apple’s leasing and financing plans. “Anything that gives customers total choice is a win for them and it is a win for T-Mobile. Unlocked phones give consumers the freedom to try out any carrier. That is a fantastic thing for T-Mobile too.”
The newest iPhone 6S and 6S Plus are also compatible with new airwaves T-Mobile uses in 170 US markets, which gives T-Mobile an even bigger boost, Wells Fargo analyst Jennifer Fritzsche wrote in a note on Thursday.
As a result, T-Mobile could see strong subscriber gains at the expense of Verizon Communications Inc. and AT&T, said Roger Entner, an analyst at Recon Analytics in Dedham, Massachusetts.
“The next step is that AT&T and Verizon will start their own leasing plans to bring down phone costs and compete against Apple,” Entner said. “Then it becomes even more of a price battle.”
Speaking at an investor conference Thursday, AT&T Chief Financial Officer John Stephens said if customers want a leasing option the company would look into it.
Verizon spokesman Jeffrey Nelson said the company is not pursuing leasing as an option right now. “Most customers prefer direct purchases,” Nelson said. “If that changes, and customers start asking for it, we will take a look.”
Wireless carriers used to lock customers into two-year contracts by selling phones below cost. Providers like AT&T and Verizon now spread the full cost of the phone over 24 monthly payments. The popularity of the zero-rate, no-money-down offers has given the carriers a new revenue stream that can be sold to raise cash.
Apple sales boost
For Apple, financing and leasing could benefit the tech giant in several ways.
For starters, the Upgrade Programme could yield a sales increase of 5 million to 7 million iPhones a year, Macquarie Securities USA analyst Kevin Smithen wrote last week.
Apple will also gain more control over the recovery and resale of used iPhones in the US and internationally, while carriers will spend less on iPhone inventory, Smithen said last week.
The benefit of leasing is that consumers can trade in their phone for a new one after a year. With financing, consumers end up owning a relatively good phone at the end of a payment period and are less apt to buy a new one, which has put pressure on sales at phone makers.
“Consumer loyalties probably lie more with smartphone vendors or brands than the carriers,” Bloomberg Intelligence analysts John Butler and Matthew Kanterman wrote in a research note on Thursday. “This could mean consumers will be more inclined to finance through Apple.”
BLOOMBERG