Analysts: iPhone 7 driving competition, but Verizon still unlikely to consider unlimited data

iPhone 7
Apple iPhone 7. Source: Apple

U.S. operators have all launched aggressive promotions in an effort to capitalize on the iPhone 7, but analysts say it’s still too early to predict whether the increased competition will continue into the holiday shopping season.

And while T-Mobile and Sprint may be well-positioned to capitalize on Apple’s new flagship, Verizon isn’t expected to respond by launching an unlimited-data plan as the two smaller carriers have.

“In the US, the major carriers were quick to align behind cost-free iPhone offers: current subscribers can get an iPhone 7 when trading in a working iPhone 6, 6s or 6s Plus,” CCS Insight wrote. “Customers sign up for a two-year financing plan for the new iPhone, but are credited back the trade-in, canceling out the monthly device payment.”

Those carrier promotions – which BayStreet Research’s Cliff Maldonado described last week as “unprecedented” – stoked pent-up demand for iPhone 7 that was already significant. Apple had warned of limited supplies of the device in its stores ahead of last Friday’s launch, and while the company hasn’t disclosed sales figures from the opening weekend, turnout appeared to be strong, if not overwhelming.

“While checks indicate generally longer lines for this year’s iPhone, the increased use of preordering and Apple’s push to set up appointments throughout the day likely masked a certain amount of iPhone demand,” Wave7 Research wrote in a note to subscribers. “Checks of seven carrier stores in the Kansas City area indicated significantly longer lines than was the case in 2015, with a total of 40 in line at the seven carrier stores (average of 5.7 per store), up from 21 last year…. An AT&T store checked in San Francisco had 14 in line before opening, consistent with Kansas City results.”

The trade-in model is a doubled-edged sword for operators, however. Carriers generally require customers to sign up for two-year financing plans for the new phones, essentially ensuring they won’t switch carriers until their phones are paid off. But the model requires operators to assume a hefty charge up front to cover the cost of the device, Wells Fargo Securities analysts wrote. And that will put pressure on revenues per subscriber in the fourth quarter.

“Instead of booking $650 in equipment revenue upfront for an iPhone 7, the carriers will record equipment revenue equal to the fair value of the trade-in plus any other amounts due (such as existing EIP balances or higher memory tiers),” Wells Fargo wrote in a research note. “In our view, it is safe to assume this revenue will be lower than in an ordinary EIP environment. In some ways, this is similar to the ‘subsidy’ model in that carriers could take a $300-400 margin hit on each phone sold. From a cash flow perspective, the upfront working capital drag may actually be lower vs. a new EIP customer, as carriers can offset the initial cash outlay with re-sale proceeds from traded-in devices. Over the life of the EIP agreement, however, total cash flows are likely to be lower.”

Meanwhile, T-Mobile and Sprint continue to tout the so-called “unlimited” plans they announced several weeks ago, and marketing efforts targeted at data-hungry users are sure to ramp up as the holiday season approaches. Verizon recently launched a “limitless” plan of 20 GB of data for four lines for $160 a month, but doesn’t intend to compete with an unlimited offering, Jefferies analysts wrote – although the nation’s largest operator claims it could if it wanted to.

“Despite competitors pushing unlimited data plans, management sees little need for Verizon to follow suit,” according to Jefferies, citing a recent conversation with Mike Stefanski, Verizon’s senior vice president of investor relations. “Unlimited plans are viewed as unsustainable long term due to questionable returns while Verizon's new safety net feature protects consumers from costly overages. Notably, management indicated that network capacity is ample to support Unlimited, if they were interested in going that direction.”

Regardless of the carrier horserace, though, Apple appears to be positioned to gain significant ground on Samsung, which remains the world’s largest smartphone vendor. The 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 temporary – hole in its lineup. And strong carrier support is crucial for smartphone vendors, especially in the U.S.

“Intense competition among operators has become a windfall for Apple. Wireless operators have been jumping over each other with offers for the iPhone 7 as market saturation drives them to act in what appears to be desperation,” CCS Insight wrote. “In the showdown between competing wireless service providers, the clear winner is Apple.”

For more:
- see this CCS Insight note

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