This Year’s iPhone Promos Are Great For Customers, Costly For Wireless Carriers

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Apple‘s (NASDAQ:AAPL) fall iPhone update cycle always sees a flurry of promotional activity in the U.S. wireless industry, as carriers look to sign lucrative iPhone customers. This year’s deals on the new iPhone 7 appear to be particularly attractive, with the four major carriers offering the base version of the new device for free, in exchange for an iPhone 6 or 6S. Below we take a look at some of the potential implications of the program on carriers.

See our complete analysis for  Verizon | AT&T |T-MobileSprint

Deals Are Attractive To Customers And Potentially Expensive For Carriers

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While there are small variations across carriers, most of these limited-time promotions essentially allow customers with a good credit history to trade in an old iPhone (6/6S/Plus) and get a $650 credit towards a new iPhone 7. Customers then have to sign up for a device payment plan to purchase the new iPhone, and the carrier will begin to credit back the amount to customers in the form of wireless bill credits over the course of 24 months. While there is some fine print, requiring certain fees and sales taxes to be paid up front, we believe that the deals are much more attractive than what we have seen over the last few years.

Although there are multiple possible scenarios and device combinations, for simplicity, we consider a customer with a 16 GB iPhone 6 (the lowest-end device eligible for the full $650 credit), upgrading to a base 32 GB iPhone 7. Assuming that the iPhone 6 device is worth about $200 to the carrier (third party trade-in service Gazelle pays up to $176), it would translate into a net outflow of about $450 over the next 24 months, without factoring interest and any fee related income. This is significantly higher than the sub-$100 net cost we estimated for Sprint’s popular $1 iPhone 6S leasing scheme last year.  (related:Why The $1 A Month iPhone 6S Offer Could Be Great For Sprint) The move is likely to drive up the customer acquisition costs for carriers in the near term, while potentially impacting average billings per user.

Carriers Benefit From Better Loyalty, Higher Quality Subscriber Base

That said, there are some advantages for carriers as well. Firstly, customer loyalty should improve and churn could decrease as a result of these promotions, as subscribers who defect before the 24-month period need to either return their iPhone 7 or pay off its full price, less the monthly credits received on their wireless bills. Moreover, they will not get back the original phone that they initially traded in, reducing the incentive to leave a carrier. Secondly, having more iPhone customers on a network is beneficial to a carrier’s financials. iPhone users are more engaged with their smartphones, and their mobile data consumption is typically higher than other smartphone users. iPhone users are generally thought to be more affluent, on average compared to users of other platforms and this could bode well for the overall credit quality of a carrier’s subscriber base.

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