Apple Inc. (AAPL) And Impact of New Plan Structures

Apple Inc. (AAPL) And Impact of New Plan Structures
Apple Inc. AAPL

Steven Milunovich, CFA and Peter Christiansen, CFA, CMT of UBS on the Impact of new plan structures for Apple Inc. (NASDAQ:AAPL)

Consumer Intelligence Research Partners (CIRP) conducted a survey of 500 US smartphone consumers from Oct-Dec to better understand the impact of new carrier contract plans. Facing increasing consumer preference for more frequent device upgrades, US carriers are beginning to offer new financing programs and early upgrade features. T-Mobile has been at the forefront in offering these new plan structures, forcing AT&T (NYSE:T) and Verizon (NYSE:VZ) to follow suit.

Traditionally, mobile subscribers in the US sign up for two-year contracts with their carrier, enticed by lower device costs in which the carrier subsidizes at least 45-50% of the cost. Carriers also have been lenient in granting customers early upgrades at the 13-15 month mark. Carriers have been motivated to allow early upgrades as a competitive strategy but more important as a means to accelerate the migration of their subscriber bases to 4G-LTE technology and reduce the number of unlimited data contracts.


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Now that smartphone penetration has reached critical mass in the US with nearly two-thirds of data traffic being 4G, AT&T and Verizon have discontinued their practice of early upgrades and are more stringent in enforcing the contracted 24-month waiting period. Looking to differentiate, T-Mobile introduced plans that essentially replace the traditional device subsidy with a financing/leasing plan. In this case, the customer finances the full price of the device, affording the consumer the flexibility to upgrade at any time. At the end of the period, the consumer can either own the device or trade it in for a newer device in the future. Consumers are attracted to the transparency of the plan structure which offers lower monthly data costs.


Competing programs like Verizon EDGE, AT&T Next, and Sprint One-Up are roughly similar—the consumer can choose how much to put down on the full retail device price and have the remaining balance divided into 24 monthly payments. Once 50% of the device is paid-off, the subscriber is eligible for an upgrade. The program still requires a two-year agreement.

 Apple Inc. (NASDAQ:AAPL) chart

Above is a simplified comparison of the various plan features and costs for an Apple Inc. (AAPL) 16GB iPhone 5S with a retail price of $650 followed by a similar device upgrade after 12 months. Consumers can save roughly $200 with AT&T or pay a premium of $100 with Verizon over two years versus a traditional plan, assuming a continuation of the upgrade plan in the third year. Presently none of the carriers offers a service-only plan, which at today’s service fees would lower the subscriber’s total cost of ownership by 10-20%. With that in mind, we suppose that carriers have no inclination of getting out of the smartphone distribution business.

In CIRP’s survey results; Android devices represented nearly two-thirds of total financed devices followed by the Apple Inc. (AAPL) iPhone making-up roughly 35%. Within Android, Samsung represented 49% of all financed phones, considerably higher than its 4Q market share of 27% (according to Gartner), implying that the majority of new Samsung activations were financed rather than subsidized.


CIRP discovered that financed activations consisted of a higher mix of the latest and most expensive devices than subsidized purchases, illustrating one obvious and one less obvious conclusion:

  1. Obvious conclusion: US consumers opt more for the most expensive option when financing the device—the 5S accounts for 72% of financed phones compared to a 50% share of subsidized devices.


  1. Not-so obvious: Premium device purchasers plan to upgrade more often in the future or at least have the flexibility in to do so compared to consumers who purchase lower-end devices.


The second point is somewhat intuitive relative to Apple Inc. (NASDAQ:AAPL)’s fall 5S/5C launch considering that many first-adopters and perhaps Apple Inc. (NASDAQ:AAPL) fanatics buy the latest device regardless of cost.

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  1. Failed to be mentioned is that you can trade in your old i-Phone when the plan expires for $200+.
    So with the new plan the phone is essentially free. Only AAPL can accomplish this and make money; because on AAPL phones have resale value.

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