Carriers Are Desperate for iPhone Customers

By Markets Fool.com


Image source: Apple.

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The newest iPhone from Apple (NASDAQ: AAPL) might not have wowed anybody, but it's guaranteed to sell millions of units. The iPhone is the most popular phone in the United States, and the four big wireless carriers are all vying for new customers.

T-Mobile (NASDAQ: TMUS) launched a promotion offering customers trading in any iPhone 6 or iPhone 6 Plus a "free" iPhone 7. Sprint (NYSE: S) quickly followed T-Mobile's lead before both Verizon (NYSE: VZ) and AT&T (NYSE: T) jumped on board as well.

That "free" iPhone, however, will cost you a bit of flexibility. Subscribers taking the deal will receive a subsidy on their equipment installment plan every month, which offsets the cost of the iPhone. If a user wants to get out early -- by either upgrading to a new phone or switching carriers -- they'll have to pay off the rest of the amount due on the device and the subsidies will stop.

It's the two-year contract all over again.

Why carriers are going back

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Carriers are signing up new customers at their slowest rate in 15 years, according to Walt Piecyk at BTIG. That's due to a combination of fewer people switching carriers and customers holding onto their phones longer.

The launch of the newest iPhone represents the carriers' best opportunity to attract new customers and get existing customers to upgrade their phones. Even if you just bought a new iPhone 6s last year, you may very well be tempted by the idea of a "free" iPhone 7.

Many subscribers have been taking advantage of new plans from carriers that separate service costs from device costs. After two years or so of making device installment payments, customers see their wireless bill drop, incentivizing customers to hold onto their old devices.

Getting users to upgrade to a new phone will boost carriers' revenue for a quarter, but cash flow could be negatively impacted. Carriers have to pay Apple for the device, and they're effectively selling it for a fraction of the cost. They'll have to make up that lost cash in service revenue over the next two years.

Carriers are willing to take that risk because iPhone owners are typically more valuable than the average customer. That's by the nature of the iPhone being a premium device.

Which carrier wins?

In recent years, T-Mobile has been extremely aggressive when new phones come out. Its efforts have paid off: "We are the net beneficiary of every major phone launch in recent years," a T-Mobile spokesperson toldThe Wall Street Journal. Sprint, too, has a lot more to gain than to lose as the smallest of the big four carriers.

AT&T and Verizon, then, are simply working to defend their positions. By mimicking the smaller carrier's promotions, they inoculate their effectiveness.What's more, they practically lock in customers for the next two years.

Nonetheless, T-Mobile and Sprint are saying their promotions have paid off. T-Mobile issued a press release the Tuesday after pre-orders for the iPhone 7 began, noting orders were "up nearly 4x compared to the next most popular iPhone." Sprint said pre-orders were up 375%. AT&T and Verizon neglected to make similar statements.

Apple is the real winner

The biggest winner of all this may be Apple. Apple had a blowout year when it released the iPhone 6, but saw its sales decline last year with the iPhone 6s. There are now a lot of iPhone 6 owners that may see these deals as a way to get the best value out of their current device.

Apple will receive its revenue from carriers no matter what promotions they run. So, the more aggressive carriers are, the better it is for Apple.

Analysts currently have relatively low expectations for iPhone 7 sales. With the indications from T-Mobile and Sprint that these promotions are spurring upgrades, Apple could be a much bigger winner than any of the four major carriers.

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Adam Levy owns shares of Apple and Verizon Communications. The Motley Fool owns shares of and recommends Apple and Verizon Communications. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends T-Mobile US. 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.