Tuesday afternoon, wireless carrier T-Mobile finally relented and announced that it will begin carrying Apple Inc. (NASDAQ:AAPL)’s iPhone. Bears can attack market share numbers all they want, but we’ve shown plenty of evidence supporting why the iPhone is exceptionally popular. Commscore showed data giving Apple a 37.8% market share in January, Verizon Communications Inc. (NYSE:VZ) reported that iPhones accounted for 63% of smartphones during the fourth quarter, and AT&T Inc. (NYSE:T) had iPhones accounting for 84% of its smartphone mix during the same period. Demand for the product remains robust, in Valuentum’s view.
Regardless, T-Mobile’s iPhone strategy is a stark departure from industry norms. T-Mobile will finance the phone, allowing consumers to purchase an iPhone 5 for $99.99 upfront with no contract, and 24 months of $20 payments, as opposed to the industry norm of $199.99 upfront with a two year contract. We like this idea for T-Mobile because its consumers tend to be more value conscious and might not be able to afford $199 at one time. Although the total cost of the phone itself will be substantially more ($580 versus $199), the financial burden of the low-end T-Mobile plan ($50/mo) plus the monthly iPhone payments isn’t much different from the low-end deal at Sprint Nextel Corporation (NYSE:S) ($199 for the iPhone + $70/mo). Of course, the plan includes the least amount of 4G data, but we at Valuentum question how many people need or upgrade to unlimited data.
At the end of the day, the deal amounts to T-Mobile taking a different course of generating revenue than its competitors, though the company runs the risk of its unlocked users opting for cheaper services. In its press release, T-Mobile made several references to “qualified customers,” so we believe the company will only allow consumers with past history and a reasonably low chance of fraud and churn to purchase the iPhone. Consumers must also may off the balance owed on the phone before switching to a different service (a de facto contract). In other words, don’t expect T-Mobile to subsidize a bunch of defectors.
The big question is whether or not this will change the wireless industry. Frankly, we at Valuentum doubt it will. T-Mobile’s move comes as the company experiences higher than average churn and needs a shot in the arm to keep customer defections from accelerating. More importantly, we doubt that other carries like Verizon, AT&T, and Sprint will look to push more costs on to customers—at least given the current environment. Verizon and AT&T sport higher ARPU than Sprint, and we think customers would balk at a change in the current system. Given the higher prices, we do not believe price is as paramount to AT&T or Verizon customers as it may be for Sprint and T-Mobile, but rather customer service and network reliability/strength. Neither T-Mobile nor Sprint can compete at this point.
Results over the past few years suggest that AT&T and Verizon’s model works well, and we think consumers, as well as Apple Inc. (NASDAQ:AAPL), might be angered at this change. Plus, under the current arrangement consumers are locked into very attractive two year contracts that make the cost of the iPhone (and other high-end smartphones) to the carriers fathomable. Most importantly, we do not see any of the major carriers wanting to get into a contract-free selling environment that could put downward pressure on prices and margins.