Apple Financing Seen as a Boon for Cheaper Carriers Like T-Mobile

Apple's Entry Into Category is Luring Some Customers Away From Biggest Carriers

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An advertisement for Apple's iPhone is displayed at a T-Mobile store in New York.
An advertisement for Apple's iPhone is displayed at a T-Mobile store in New York. Credit: Michael Nagle/Bloomberg

Apple's entry into iPhone financing is starting to dislodge some customers from the biggest carriers and sending them shopping for cheaper, smaller providers like T-Mobile.

T-Mobile said last week it had its best iPhone quarter ever, not only because of surging sales in its own stores but also from consumers who bought their handset directly from Apple, just as analysts had predicted. Sprint's quarterly results on Tuesday may show more evidence that Apple's September move to sell iPhones in monthly installments is so far benefiting lower-priced carriers.

Apple's program, starting at about $32 a month for handsets that can work on any carrier's network, threatens to displace wireless carriers from the crucial person-to-person sales role. Without loyalty to a carrier, consumers will make their decisions based on cost comparisons on service plans, which gives T-Mobile and Sprint an edge versus the two largest U.S. carriers, Verizon Communications and AT&T.

"Separating the phone sale from the carrier is bad for the incumbents," said Kevin Smithen, an analyst with Macquarie Securities USA. "If consumers take the time to go to Apple and get an unlocked device, then they have already decided not to go the easy route and just get an upgrade from the carrier.''

T-Mobile, for one, embraced Apple's move to financing.

"We love it," Mike Sievert, T-Mobile's chief operating officer, said in an interview last Tuesday. "It is interesting. It's simplistic. It brings consumers more options and it's been a benefit to us."

Challenging year
It has already been a challenging year for holding on to mobile customers in the U.S. In February, under pressure from consumer groups, all the major wireless carriers voluntarily agreed to unlock phones upon request. In the past, carriers kept their customers in part by making their phones work only on their own networks.

Carriers have been phasing out of two-year contracts, a longtime practice that helped Verizon and AT&T, in particular, hold on to customers longer in exchange for phone subsidies. All of them moved to phone financing, spreading the full cost of over multiple monthly payments. But only T-Mobile and Sprint went a step further with leasing that gives customers phones on a rental basis. Leasing plans are at least half the cost of the carriers' average $35-a-month financing plan.

AT&T and Verizon say they don't see much demand for phone leasing yet. They have relied on phone financing and tablet promotions to keep subscriber numbers up.

"I don't think it's a good deal for the consumer -- paying for the phone but not owning it," said John Stephens, AT&T's chief financial officer, in an interview after reporting earnings on Oct. 22. "But I'm just the finance guy. If our management thought customers wanted leasing, then we'd do it."

Verizon says the carriers could still be blamed if something goes wrong with phones bought with Apple's plan.

"If Apple finances the phone I don't have to," Verizon CFO Fran Shammo said in an interview last month after the company released earnings. "But the problem comes if the customer has a negative experience. They'll expect Verizon to take care of the issues. I don't think the ecosystem impact was fully thought through."

Kelly Crummey, a spokeswoman for Verizon, declined to comment for this story. AT&T referred to comments CFO Stephens made during the company's earnings conference call with analysts. Apple, under its installment program, sent AT&T "a high number of phones," Stephens said then.

At T-Mobile, promotions and lease plans that start at $5 a month for 18 months with a trade-in helped boost new monthly phone subscriber additions to 843,000 last quarter. That's almost twice as many as Verizon's 430,000. AT&T lost 459,000 phone customers, according to JPMorgan Chase & Co. analyst Philip Cusick. The discounts put pressure on T-Mobile's profit, which missed profit estimates. Verizon and AT&T, unwilling to match their smaller rivals' promotions, both reported earnings that topped analysts' predictions.

Sprint, which is unprofitable and facing a challenging turnaround effort, has been the most aggressive on pricing, with leases for the iPhone 6S starting at a $1 a month with trade-ins. The carrier, which has posted three consecutive quarters of user growth following seven years of customer defections, may report an addition of 321,000 monthly subscribers for the third quarter, based on five analysts surveyed by Bloomberg.

Sprint spokeswoman Adrienne Norton declined comment ahead of the earnings.

While it's still early to assess the full impact of Apple's financing plans -- the program started in the very last days of the third quarter and carriers typically don't disclose the numbers of iPhones they sell -- there's little doubt it will disrupt the wireless industry in the longer term.

Analysts anticipate that 3 million to 9 million consumers will sign up for the program in its first year. The numbers may eventually increase to as many as 20% of all iPhone buyers, said Amit Daryanani, an analyst at RBC Capital Markets. And Samsung Electronics, the world's biggest maker of mobile phones, may follow suit with its own plan, according to wireless analyst Chetan Sharma.

-- Bloomberg News

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