A Shareholders Guide To Apple's iPhone Trade-In Program

| About: Apple Inc. (AAPL)

As long ago as June, Bloomberg reported that Apple (NASDAQ:AAPL) would be rolling out a trade-in program for the iPhone to help customers who wanted to defray the cost of a new device; over Labor Day weekend, the plan finally went into effect at Apple stores. Given the expected introduction of the new iPhone 5S and the iPhone 5C on September 10, the timing of the new plan makes sense. The two major concerns for shareholders, of course, are the impacts the plan may have on Apple's bottom line and how the Apple trade-in program positions the company relative to competitors - remember that within the last month or so, early upgrade plans have been released by T-Mobile (NASDAQ:TMUS), Verizon (VZ) and AT&T (NYSE:T).

The iPhone Reuse and Recycle Program

Apple's new initiative, dubbed the "iPhone Reuse and Recycle Program," provides a discount to customers at the Apple store who turn in their current iPhone for a newer model and sign up for a new contract. The factors that impact the price that you will get for your old iPhone include the model, age and condition of the device, but the consensus belief in that other options - like those offered by Gazelle, for example - will offer a better price. The high-end of the range looks to be about $280 for a newer device in excellent condition.

Another feature of the program that seems like more a marketing ploy than a critical inclusion is that through its partnership with Brightstar, the recycled devices will be used for domestic resale. Apple has been making a big push of late to focus on the U.S. market, so it wants it made clear that reused devices are not being slated for overseas sale. To most consumers, however, the point is that you will save the hassle of selling the old iPhone to a third party, but the convenience comes at a real cost.

Apple's Bottom Line

While it is easy to look at the program and wonder where Apple will get the cash to pay for all of these traded-in iPhones - not that Apple is in any way short of cash - the program could end up as a net positive for Cupertino. Without even considering the revenue that may be generated from the sale of the rehabbed iPhones, Apple may receive a commission from wireless carriers for signing customers up for the new contract required to receive the discount in the program. The specific amount of these commissions are a closely guarded secret, but when you consider how much a 2-year service plan is worth to the wireless carrier, even at a small percentage, the amount could reasonably cover the cost of the discount being offered.

This belief is bolstered by the fact that the GSM and CDMA version of the iPhone are worth different amounts. There is more flexibility with the GSM version, but if all are being targeted for U.S. sale, the difference should be meaningless. Different commission structures with Verizon vs. AT&T, T-Mobile and Sprint (NYSE:S) might better explain the differences. Ultimately, the program has the potential to be revenue neutral or positive for Apple.

Does It Matter?

Despite the banner news that the program's release might seem to represent, shareholders should be more concerned with how popular it is likely to be among consumers. Under T-Mobile's JUMP!, Verizon's Edge and AT&T's Next, you are able to upgrade your smartphone with increasing frequency. Each plan is designed to help wireless providers defray an increasing amount of the subsidies they have been paying for years under the classic wireless model. T-Mobile requires you to pay an additional monthly fee to be a part of JUMP!, requires a down payment, and lets you spread payments over time. The AT&T and Verizon plans require no additional fee - T-Mobile correctly claims these are already built into its plans - require different monthly payments, and allow for upgrades more quickly as well. T-Mobile and Verizon let you upgrade twice a year, while AT&T only permits annual upgrades.

The point for Apple shareholders is that, even with the iPhone Reuse and Recycle Program, consumers who are interested in getting a new device more frequently are likely to favor plans from carriers that cause them to be less out-of-pocket than buying from an Apple Store might. CEO Tim Cook made clear that he wanted to drive more business from the company's retail locations. The new plans from all three carriers have the potential to redefine the industry, and, if they do, lead to the end of the longer term, subsidized options that make the most sense with Apple's new program. Shareholders should be pleased that Apple has an entrant in the game and that it has the potential to be a money maker, but they should watch early numbers to see if the program will be popular enough to matter.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.