Should Apple Investors Fear the End of 2-Year Contracts?

Apple's current iPhone lineup. Image source: Flickr/Karlis Dambrans.

Love him or hate him, there's no denying that T-Mobile's John Legere has changed the entire wireless industry. A little over two years ago, the company famously scrapped the two-year contract, and the most onerous clauses thereof, by eliminating the device subsidy. Fortunately for the company, consumers wary of long-term wireless contracts have embraced the change with enthusiasm.

As a result, T-Mobile has added millions of subscribers, even recently passing rival Sprint as the third largest U.S. wireless provider. More importantly, however, it appears T-Mobile has redefined the relationship between subscribers and carriers, as recently both Sprint and Verizon decided to abandon the device subsidy in favor of T-Mobile's model of discounted service and monthly device installments with no subsidy.

Perhaps more interesting are the prospects for the device makers themselves. For premium vendors such as Apple and Samsung, will a loss of the device subsidy hit these companies' bottom lines?

The answer is more nuanced than it initially appears At first glance, the answer appears to be yes. Using Apple's iPhone as an example, the device is extremely popular in the U.S. and Japanese markets, those currently with heavy device subsidies. But it could face a tougher road now that only one U.S. carrier, AT&T, engages in the practice. However, while subscribers will be forced to pay the full cost of the device, it still could be a better deal in the long run.

If that sounds odd, you have to remember the economic axiom that there's no such thing as a free lunch. Most "subsidies" were simply recouped by higher monthly wireless bills, hence the early-termination fee if subscribers broke the contract. T-Mobile's bills plus equipment-leasing fees are very competitive with, if not cheaper than, standard two-year contacts.

Considering most shoppers will compare their new combined bill with their current contract plan, this shouldn't initially hurt sales too much, although it may slow future upgrade cycles once a phone is paid off and the phone's cost disappears from the bill.

Sprint's plan may increase iPhone salesAlong with Sprint's announcement that it's shelving device subsidies, the company also announced a plan that could increase iPhone sales. Dubbed "iPhone Forever," the plan allows a customer to lease the newest iPhone every year, as opposed to its former version that allowed upgrades every two years.

Per The Wall Street Journal, the initial leasing fee for the entry-level unit will cost $22 per month, or $264 per year, for a unit with a $649 retail price. For Apple, however, these phones count as a sold model, as the leasing agreement is between Sprint and the consumer. This does present risk to Sprint, as the company should have increased iPhone inventory. If the company is unable to sell or lease returned units, it could affect future monthly lease prices or leave Sprint with excess inventory. However, in the beginning, Sprint's movement toward leasing phones should be beneficial for Apple.

More broadly, and for the long term, I expect that smartphone sales will continue to be driven by the quality of the product more so than the presence or absence of the subsidy, as the monthly bills should be similar. For technology investors, continue to look for high-quality, innovative units and ignore the conventional wisdom that the migration away from subsidies will hurt device manufacturers.

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Jamal Carnette owns shares of Apple, AT&T, and Sprint. The Motley Fool recommends Apple and Verizon Communications. The Motley Fool owns shares of Apple. 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.

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