Which Carrier Stands To Gain The Most From iPhone 7 Promos?

Apple‘s (NASDAQ:AAPL) fall iPhone launch cycles generally sees a flurry of activity in the U.S. wireless industry, as carriers rely on promotions of the handset to win over high-spending wireless customers. This year’s promos on the iPhone 7 appear to be the most aggressive we have seen over the device’s 9 year history, with nationwide carriers offering the iPhone for free with trade-in offers. Although we believe the offers are a net negative for the industry, with costs largely rising for major players, Sprint could see the lowest financial impact while T-Mobile could see the strongest customer gains. Below we size up the impact of the new wireless plans on the industry.

See our complete analysis for  AT&T | Verizon | Sprint

T-Mobile Will Gain Subscribers, Reduce Churn At Expense Of Lower Revenues, Margins

Limited-time promotions from AT&T, Verizon and T-Mobile (most of which have ended) 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 after then sign up for a device payment plan. This could effectively translate into a net subsidy cost of as much as $450 per device, depending on the phone they trade in. Although we have seen subsidies of this magnitude in the past (mostly prior to 2015), customers typically compensated for this via higher monthly service billings. However, the industry has largely shifted towards the EIP model, where they pay a lower service fee, while equipment related charges are paid separately. Now, with the new iPhone offers, customers are effectively enjoying lower service billings, without having to pay the device component of billings. This should put pressure on average billings per account and equipment revenues of carriers, while compressing wireless EBITDA margins. That said, there could be some benefits as well, particularly in terms of lower churn figures, as customers are locked into 24-month device payment agreements. Overall, we expect T-Mobile to win over the most postpaid customers with its offers, posting positive porting ratios versus Verizon and AT&T. The carrier noted that pre-orders for iPhone 7 were 4x that of the iPhone 6.

Sprint Could Emerge The Biggest Winner

However, Sprint – the smallest of the four carriers – stands to gain the most from these promos, on account of its decision to offer the trade-in deal under its leasing scheme, rather than via equipment installment plans (EIP). ^[1] This essentially means that customers will trade in an iPhone 6/6S/Plus (valued at $200 or more) in return for an iPhone 7, while eventually handing their iPhone 7 back to Sprint at the end of the 18-month lease period. This would allow Sprint to capture the residual value of the iPhone 7 as well (potentially $200+), effectively cutting its subsidy outflow by close to half compared to the other carriers, who allow customers to keep the device at the end of the EIP period. Sprint’s relationship with Brightstar – the world’s largest vendor of used and refurbished phones, and also part of the Softbank group – should ensure that it captures greater value from its used devices. The fact that the carrier is losing less money per iPhone 7 sign-on could explain why it is continuing to run the promotion while its larger rivals AT&T and T-Mobile have already ended their offers. The carrier has noted that iPhone 7 pre-orders were 5x higher compared to the 6S and it’s possible that the uptake could continue going forward.

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1. Sprint May Be Last to Offer Free iPhone, Barrons, September 2016 [↩]