Long coveted by consumers, the iPhone has come to be quietly begrudged by some partner wireless operators, who, owing to the device’s overwhelming popularity, pay Apple Inc. far higher prices per unit than they do on other smartphones.
Yet some say a shift is afoot that could restore a degree of power to carriers and in the process deliver to their investors a cut of the windfall now enjoyed by Apple shareholders.
Analysts at BMO Capital Markets said in a note Monday they believe unit costs for Apple devices are coming under pressure as new competitors nip at the iPhone’s heels and changing demographics in the smartphone market start to favour lower-cost handsets
Apple has garnered the ‘vast majority of the economic benefit of selling the iPhone through the carriers’
The iPhone’s sheer pervasiveness, as multiple carriers in a market actively sell the device where once there was only one, is also diminishing the phone’s once-untouchable appeal and Apple’s pricing power by extension.
“There is a broadening view that over the next year or two iPhone subsidies relative to competitive offerings will come down,” BMO’s Peter Rhamey said in a report to clients.
That’s welcome news for shareholders of Rogers Communications Inc., BCE Inc. and Telus Corp., the three Canadian operators who sell the device. BMO says each stand to reap a bump in profits if they can negotiate down equipment costs paid to Apple.
“In the event of a $100 improvement to iPhone subsidies, we estimate that Bell, Rogers and Telus earnings would benefit,” Mr. Rhamey said.
A discount of that size would boost earnings for Rogers, the country’s largest wireless carrier, by 6%, BMO predicts, or about 20¢ per share based on analyst estimates. Telus’s EPS would get a similar lift of about 5% while BCE, which relies less on wireless than the others, would see a boost of 3%, or just under 10¢ a share.
Analysts estimate Apple sells new iPhones to operators for between $600 and $650 per unit on average. Carriers then sell the phone to customers for $199 on a three-year term. This upfront “subsidy” on iPhone devices is between $200 and $300 higher than its closest smartphone competitor, analysts say.
Carrier executives have long argued the trade-off is higher customer growth, elevated average revenue per user over the life of iPhone contracts and lower churn, or defections to competitors.
Still, almost annual new product releases from Apple — which have the effect of triggering a crush of demand from customers, many of whom took a subsidized upgrade a year earlier — have weighed down carrier margins.
Apple, meanwhile, has garnered the “vast majority of the economic benefit of selling the iPhone through the carriers,” BMO said. “This is clearly evident from the financial and operating performance of Apple’s stock relative to the telecom industry.”
But most higher-spending smartphone subscribers have been captured, forcing Apple to try to appeal to “value conscious” users, or those who haven’t traditionally been able to afford an iPhone.
The trouble for Apple is that this segment is already being filled out by cheaper but functionally competitive alternatives, such as Android devices made by Samsung and HTC Corp. — and even Research In Motion’s BlackBerrys. If Apple’s sales momentum is to continue, its pricing might have to relent first.