iPhone 6s. Source: Apple.
Thanks in large part to T-Mobile , the domestic wireless industry has been quickly transitioning away from subsidies and traditional two-year contracts. It all started in 2013 with T-Mobile's Uncarrier 1.0 initiative that replaced service contracts with installment plans, and all of the national carriers have now followed suit with installment plans or early upgrade programs of their own.
Sprint has targeted iPhone users directly on multiple occasions, most recently with its iPhone Forever leasing program. One common criticism, though, is that consumers aren't actually freed from the shackles of service agreements. Consumers are still tethered to their carriers, just by an installment or leasing plan instead of a service contract.
Meanwhile, Apple's Tim Cook has acknowledged that the net result of this secular shift is that iPhone upgrade cycles are accelerating. To that end, it makes plenty of sense why Apple is now launching its own iPhone Upgrade Program. And carriers should hate it.
How it worksFirst off, let's cover what Apple's program includes. For a monthly fee, consumers can get a new unlocked iPhone every year and choose which carrier to use. A 24-month installment agreement is required, and AppleCare+ is included for handset protection and insurance. On the backend, Apple is outsourcing the financing of the program to Citizens One, much like how it outsources its recycling and trade-in programs. Users are able to upgrade to a new iPhone after 12 payments, and start a new cycle.
It's worth noting that there is an approximately $30 premium associated with signing up, though. The total of the payments is roughly $30 higher than if you were to purchase an unlocked iPhone with AppleCare+ at full retail price. For example, an entry-level 16 GB iPhone 6s with AppleCare+ would normally cost $749, but paying $32.41 for 24 months adds up to roughly $778. That $30 buys the convenience of a seamless upgrade process.
Why Apple investors should love itiPhone users are already extremely loyal to Apple, and Apple's business relies on this steady stream of recurring revenue. It is one of the few consumer electronics companies that can consistently generate recurring revenue from regular hardware upgrades. Commoditized rivals aren't afforded this luxury, as they must continuously compete on price.
Carriers are still responsible for the majority of iPhone distribution, which is something that Cook has been trying to change in recent years. Bringing consumers to Apple stores instead of a carrier retail store not only provides for a better sales experience, but also opens up the possibility of cross-selling other Apple products. Two years ago, only 20% of iPhones were sold through Apple Stores, and Cook wants that figure higher. It's not clear how much progress Apple has made since then.
The new annual upgrade program not only adds visibility to future upgrade cycles, but it helps Apple sell more iPhones directly as opposed to through carriers.
Why carriers should hate itSince the beginning of time, wireless carriers have valiantly fought to avoid service commoditization. They've tried using things like device exclusivity and service contracts, both of which are on the decline. Sure, some networks are better or worse based on different metrics or geographies, but ultimately wireless service is a commodity.
But if a consumer enrolls in Apple's new program directly, they're truly free to switch between carriers at any time. For example, T-Mobile's John Legere made it clear that if his company wasn't delivering good service, customers should leave and find better service. But doing so requires paying off that installment plan, which would inevitably be several hundred dollars. Imagine if those leasing payments went to Apple instead, and you really could just switch carriers at the drop of a hat.
If Apple is able to relegate the carriers to little more than wireless pipes (which they are), the carriers will be forced to compete more heavily on price since consumers will have even greater portability. Churn rates could rise as ARPU and margins fall. Whether Apple's iPhone Upgrade Program hurts carriers in any meaningful way will depend on how many consumers Apple can get to sign up.
The article Why Carriers Should Hate Apple, Inc.'s New iPhone Upgrade Program originally appeared on Fool.com.
Evan Niu, CFA owns shares of Apple. The Motley Fool owns and recommends 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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