Free iPhone 7 promotions from wireless carriers are causing preorders for the handset to skyrocket, leading AT&T and T-Mobile to vow that the campaigns are merely temporary.
In a meeting with Jefferies Wednesday, members of the AT&T investor relations team confirmed that management expected the promotions to be temporary, given ongoing concerns about profit margins.
“The promotion was noted as driving better volumes, but will come with some margin pressures in 3Q/4Q,” Jefferies wrote in summary of the meeting. AT&T didn't indicate when the promotions would end.
The following day, T-Mobile executives announced during an investor conference that its iPhone 7 promotion would end the following Sunday, September 25. “Our promotion is ending on Sunday ... Then we’ll be executing a new plan," said Mike Sievert, COO of T-Mobile. He did not provide details on the new plan.
Following the announcement of Apple's iPhone 7, the four major carriers in the U.S. – T-Mobile US, Verizon, AT&T and Sprint – all began offering aggressive promotions that one analyst called “unprecedented.” Most promos didn't build the phones' payment into customers' service plans, they simply allowed customers to trade in an iPhone 6 that was paid off and get a free iPhone 7.
These promos harkened back to the days of phone subsidies offered by carriers, but the promotions are starting to wear on carriers' profit margins.
Deutsche Bank found that the promotions were incredibly lucrative for Apple, which saw a surge in pre-orders. However, they also represented the equivalent of $150-$200 subsidy per phone coming out of the carriers' pockets.
“We believe Apple's gain could become the carriers’ pain from a margin perspective, especially with an aggressive push from all four carriers,” Matthew Niknam, Whitney Fletcher and Benjamin Soff of Deutsche Bank's research team wrote in a recent industry update.
For T-Mobile's part, the carrier explained that the promos were part of a temporary strategy to maximize subscriber churn – though given that all four carriers provided such a promo, it's unclear how effective that strategy will be.
"Everything we do from a promotional standpoint is planned well in advance and we knew exactly what time period we would have this promotion out there. It was fully embedded in all of our internal financial planning," explained Braxton Carter, EVP and CFO at T-Mobile, during the Goldman Sachs conference.
Sievert contended that the timing worked out in the carrier's favor. “We understand the economics really well so we planned accordingly," he said. "The plan is working really, really well.”
Meanwhile, AT&T representatives speaking to Jefferies acknowledged some potential share loss from the strategy, but said the company planned to offset it through prepaid phone adds.
“With respect to share loss, the company expects a bit of an uptick in 4Q, given the 2G network shutdown, but expects to have a chance to mitigate some share loss by migrating subscribers to prepaid offerings. The company continues to see the majority of share loss from its lower end subscribers,” Jefferies wrote.
This post was updated on September 22, 2016 at 12:01 p.m. to reflect the announcement from T-Mobile.
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