How T-Mobile Is Paying for All Those Free iPhones

By Markets Fool.com


Image source: Apple.

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The Apple (NASDAQ: AAPL) iPhone 7 is a hit at T-Mobile (NASDAQ: TMUS).

The third-place carrier announced last week iPhone 7 preorders were up almost four times compared with the next most popular iPhone. That's likely due in part to the aggressive promotion T-Mobile ran, offering a free iPhone 7 to customers willing to trade in their iPhone 6 or iPhone 6s. Competitors Sprint, Verizon (NYSE: VZ), and AT&T (NYSE: T) quickly followed with similar promotions.

But subsidizing the cost of all those free iPhones won't be cheap. To make up the costs, T-Mobile has started requiring customers to subscribe to its new T-Mobile One service plan. The new plan offers unlimited data (with a few caveats on how you can use it), but it's likely more expensive than most T-Mobile customers' current plans. Other carriers are less restrictive.

Raising average service revenue

The T-Mobile One plan costs $70 for a single line, but as little as $140 per month for four phones. The average T-Mobile plan has 2.6 customers per account, each paying $47.11 per month. Assuming accounts taking T-Mobile up on its free iPhone 7 offer are similar to its average account, T-Mobile should see a significant increase in average service revenue per customer.

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It's hard to think of a case where customers will end up paying less than they currently pay after "upgrading" to T-Mobile One. That's clearly part of management's intent.

After several years of taking customers away from AT&T, Verizon, and Sprint by competing on price and added value, T-Mobile is making efforts to raise prices and attract more family plans.

While T-Mobile One is effectively a price increase for existing T-Mobile customers, it might be an attractive option for AT&T and Verizon customers. AT&T's average postpaid phone subscriber pays $59.80 per month for wireless service. Verizon doesn't break out phone subscribers specifically, but all postpaid subscribers (including lower-cost tablets, wearables, and internet-of-things devices) paid an average of $48.04 per month. As such, T-Mobile One may offer better value to those subscribers in areas where T-Mobile has a strong network.

Attracting family plan customers

The one factor that could prevent T-Mobile from increasing its average revenue per subscriber is if it attracts a huge proportion of family plan customers (that is, three or more phones per account). T-Mobile would certainly be happy with that result.

Family plan customers tend to stick around longer than individual customers. They require multiple users to coordinate the switch, which can get complicated -- especially if those customers all upgraded their phones at different times.

T-Mobile is lagging behind the competition in family plans. As mentioned, its average account has 2.6 subscribers. Verizon, for comparison, boasts 3.02 subscribers per account.

A new iPhone release is possibly the best time to grab family plan subscribers. The iPhone is by far the most popular phone in the United States, grabbing around 44% of the market, according to data from comScore.

Investors should watch for an increase in both average revenue per subscriber and customers per account when T-Mobile reports its fourth-quarter earnings results next year. Any commentary from management on the third-quarter earnings call could prove even more useful in determining the effectiveness of its iPhone promotion.

T-Mobile will take a hit in cash flow upfront as it supplies all of its free iPhones, but the potential to increase its average service revenue and continue stealing subscribers away from the competition make it worthwhile.

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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.