Among the deluge of information from Apple's (NASDAQ: AAPL) recent product announcements, it would be easy for investors to miss the implications of the company's iPhone Upgrade Program. With new iPhones, a bigger iPad, reduced iCloud pricing, and more, it's easy to ignore an offering that was barely mentioned. That being said, Apple might have just turned wireless carrier's equipment plans on their ear.
10 Million Reasons to Think This is Important
If Apple's iPhone Upgrade Program is going to be worth it to consumers, there is one big question that needs to be answered. Do iPhone owners want warranty coverage for their devices? A quick search on Google for "Apple iPhone repair" turns up well over 10 million results. Since the Upgrade Program includes AppleCare+, it's a good bet that Apple believes customers want some type of protection for their investment.
T-Mobile (NYSE: TMUS) is being aggressive, with a "special introductory pricing" of $20 per month for the iPhone 6S on its "Jump On Demand" program. However, after this "limited time offer" expires, the monthly price will go up to $27. At an expected retail price of $650 for the iPhone 6S 16 GB, roughly $27 a month would be the standard 24 month purchase contract. Apple is suggesting $32.41 per month for its Upgrade Program on the iPhone 6S, but is this competitive?
Sprint seems to be the most aggressive after T-Mobile's promotion. That being said, to get the same benefits of the Upgrade Program with AppleCare+, Apple actually beats 3 out of the four carriers on price.
The Carrier Perspective: Friend of Foe?
Since the iPhone was first introduced, carriers have alternately cheered and decried the device's ability to attract customers. When carriers added more postpaid subscribers than they originally expected, the iPhone got the credit. However, when margins came in lower than expected, iPhone subsidies received the blame.
That being said, from AT&T to T-Mobile, customers are choosing smartphones in overwhelming numbers. Since purchase or leasing contracts have become the norm, all four of these carriers generate significant revenue from equipment. Investors in each company need to ask, what if Apple takes some of this equipment revenue with the iPhone Upgrade Program?
Apart from Sprint, each carrier witnessed significant equipment revenue growth. It also seems obvious that aside from T-Mobile, these carriers need their equipment revenue growth to offset a decline in service revenue.
It will likely take months, or even a few years, for Apple to make a dent in equipment revenue growth. Arguably, T-Mobile could stand to benefit the most, as the only carrier with positive service revenue growth. AT&T and Verizon's wireless divisions would seem to be at the biggest disadvantage, as equipment revenue is driving their overall wireless revenue growth.
Where Sprint is concerned, Apple's iPhone Upgrade Program would help lessen the company's capital needs to purchase the equipment. However, it would also make customers carrier agnostic, which could hurt the carrier with the weakest relative service revenue.
A New Line Item in Apple's Earnings
While analysts are trying to figure out what the new iPad Pro, or the iPhone 6S and 6S Plus, will mean for future earnings, the Upgrade Program could be an important factor in Apple's future growth. Keep in mind, that between the four major carriers, they generated a combined $10 billion in equipment revenue last quarter. On a weighted average basis, this revenue grew at a 36% annual rate.
In Apple's last quarter, the company produced over $31 billion in sales from the iPhone, and its second largest category was its Mac division with $6 billion in sales. Though no one is suggesting that Apple will take all $10 billion in equipment revenue from the four major carriers, this is almost certain to be a good business for the company.
Even if Apple only ended up with 10% of this equipment revenue, this would have added $1 billion to the company's top line. At a 36% annual growth rate between the four carriers, this would have been the third fastest growing segment behind only the iPhone and "Other" (Apple Watch, Apple TV, etc.) segments.
Final Thoughts
While the new iPhones and the iPad Pro may get most of the press, Apple's iPhone Upgrade Program could be a disruptive force in the wireless industry. Investors in AT&T and Verizon need to watch equipment revenue growth closely, to see if Apple is stealing some of this business. T-Mobile investors should be excited, as the only carrier with positive service revenue growth. Sprint has the best combined upgrade price. However, investors should question if this will be sustainable, for a company burning cash and showing declining service revenue.
The good news for Apple investors is, the company just made it even easier to upgrade to a new iPhone each year. Since the iPhone makes up almost 60% of Apple's revenue, making this annual upgrade as easy as possible, should keep this huge business moving forward. Unfortunately for the carriers, they may have a new reason to complain about the iPhone, and all of the equipment revenue they used to receive.
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