Aggressive iPhone promotions could weigh on industry margins as competition heats up

As expected, aggressive carrier promotions are resulting in strong carrier demand for Apple’s new iPhone. But that demand could weigh on industry margins as competition continues to increase.

“This morning, both T-Mobile and Sprint announced strong iPhone 7 pre-orders,” UBS wrote in a research note sent to investors late Tuesday. “For T-Mobile, opening weekend pre-orders were nearly 4x those for the iPhone 6/6Plus while Sprint’s pre-orders were (roughly) 4x those for the iPhone 6S/6S Plus.

“While T-Mobile’s customer growth helps with the comparison,” UBS continued, “we believe this announcement, combined with aggressive trade-in offers across the Nationals, suggests volumes will likely exceed 2H15 but comps relative to a record 2H14 are still too early to gauge. T-Mobile/Sprint’s new attractive unlimited offers are also likely resonating with customers.”

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The new iPhone comes to market at an opportune time. The iPhone SE, which didn’t offer any new features or design, launched in March and competed against Samsung’s Galaxy S7, a high-end device that became the best-selling phone of the first half of 2016.

But the flagship iPhone 7 hit the shelves just as Samsung was experiencing reports of incendiary batteries in its new Galaxy Note 7. The South Korean vendor finally had to recall the device, leaving a notable – if perhaps temporary – hole in its lineup.

Meanwhile, all four major U.S. operators are offering $650 in credits to users who trade in an iPhone 6 series phone and upgrade to the new model. The trade-in values are roughly twice those extended by carriers last year, UBS said, and should drive upgrade activity significantly.

The increasing competition among carriers follows a relatively placid second quarter. If the new iPhone proves compelling – and if Samsung proves it can address the legitimate concerns about the battery in its Galaxy Note 7 – that competition could grow as the all-important holiday season nears.

“We estimate the carriers are losing (roughly) $300 per iPhone under the trade-in promos (creeping back toward the $450 hit under the old subsidy model,” which depending on uptake, could provide incremental pressure on margins,” according to UBS. “When AT&T launches its new OTT offerings (which could come in the next few weeks), competition could ramp even further.”

New Street Research analysts predict the situation likely benefits T-Mobile and Sprint, enabling the two smaller players to continue to narrow the gap with their larger rivals. “It is early days,” New Street wrote, “but these data points seem to support our thesis that industry volumes and churn will rise sharply from now through year-end, accelerating share gains by the challengers and pressuring margins across the group.”

Analysts at Wells Fargo Research agreed, although they noted that AT&T – which was the first carrier to offer the iPhone – still claims the largest embedded base of Apple users. Those customers are likely among the “stickiest” the carrier has, but they may not be enough to fend off gains from T-Mobile and Sprint.

“While we are still waiting for the two largest wireless carriers to release pre-order metrics, early indications from Sprint and T-Mobile show iPhone demand remains strong,” Wells Fargo analysts wrote. “Results would indicate continued trajectory of Sprint/T-Mobile taking gross adds share from (their) larger competitors.”

Related articles:
iPhone 7 receives ‘unprecedented’ promotions from U.S. wireless carriers, analyst notes
New Street survey: ‘Significant’ pent-up demand for new iPhone, Sprint and T-Mobile to profit
The iPhone 7 offers some unexpected new features
Samsung halts shipments of Galaxy Note 7 on reports of exploding batteries

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