How The New iPhone Launch Benefits Discount Carriers

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Includes: AAPL, S, T, TMUS, VZ
by: Quinn Foley

Summary

Discount carriers TMUS and S have been taking share from VZ and T.

New research suggests that the release of the new iPhone will cause more customers to switch to the discount carriers.

Expect TMUS and S to continue to outperform over the next few quarters.

Discount carriers T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) have been taking share from their larger rivals Verizon (NYSE:VZ) and AT&T (NYSE:T) in recent quarters, and it looks like the trend might continue. According to research firm New Street Research there is significant "pent-up demand" for the new Apple (NASDAQ:AAPL) iPhone that will likely translate into subscriber growth for TMUS and S at the expense of VZ and T. The new iPhone will be similar to the iPhone 6 and 6s in terms of basic design, but the next release will come packed with new features including a pressure-sensitive home button, a dual camera capable of taking more detailed photos, and no headphone jack. According to the survey of 1,000 respondents, 22% planned to purchase the new iPhone, and 10% planned to switch from their existing carrier to a new one in the next quarter. 6% of respondents said they were specifically waiting for the new iPhone to switch. Assuming that the respondent pool is a representative sample, this suggests a wireless industry churn rate (the percentage of subscribers who switch to a new carrier) of 2.5% for the fourth quarter, which would be higher than the comparable period of the last two years.

The exact reason why the new iPhone would cause subscribers to switch to the discount carriers is up for debate, but we think it has something to do with the weak health of the US economy, particularly among younger demographics who use phones more than any other and are responsible for the bulk of the new phone purchases. The unemployment rate is actually very high after taking into account labor force participation, which sits near a 30-year low, and income growth has remained flat. Customers switch from T and VZ due to cost, and we think the combination of poor job prospects and high student debt have made millennials more sensitive to price. As the US economy has slowed, discount carriers TMUS and S have increased market share and retained more of their customers. In the latest quarter T-Mobile had 646,000 branded postpaid net phone adds, which marked the 10th consecutive quarter of industry leading subscriber growth. Sprint had 173,000 net adds, its highest total in nine years, after four consecutive quarters of subscriber growth. Verizon, meanwhile, saw its subscriber adds decline 46% y/y to 615,000, while AT&T has actually lost customers. As you might expect, churn for TMUS and Sprint has been declining both y/y and sequentially: in the latest quarter the churn rate for TMUS and S fell to 1.27% and 1.39% respectively, both of which were record lows for the companies.

Phone customers tend to stick with their carriers despite new phone launches, choosing instead to switch either because of network quality issues or cost. However, we suspect that the new iPhone will be different enough from the previous installment that it can catalyze a switch to new carriers. Seasonality in the wireless industry supports the idea that new phone purchases can have this effect: carriers add the most subscribers to their networks during the holiday season, which reflects new cell phone purchases or phones received as presents. If you are going to switch to a new carrier, it makes sense to do so when purchasing a new phone, and if the demand for a new phone is strong enough, it can have a material impact on subscriber growth. We believe that the trends we have seen in recent quarters will persist and that Verizon and Sprint will struggle to maintain share against their discount competitors. We would not be surprised if churn for VZ and S increased markedly over last year, and if TMUS and S beat guidance for new subscriber growth.

Conclusion:

I have written in previous articles about how the weak US economy was the driving force behind the success of TMUS and S in recent quarters. Now research suggests that the new iPhone launch will lead to more market share gains for the discount carriers, and we think the research has some merit. Expect T-Mobile and Sprint to continue to outperform Verizon and AT&T over the next few quarters.

Disclosure: I/we 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.