On Sept. 9, 2015, Apple (NASDAQ: AAPL) announced a new plan under which it will finance consumers' purchases of new, unlocked iPhones. Sales of iPhones continue to account for 60% of Apple's revenue, even as the company introduces newer and flashier gadgets, such as Apple TV and the Apple Watch. This new program will upend the cellphone carriers' role in providing such financing while making it easier for users to change service providers. It will also bring more traffic into the brick-and-mortar and online Apple stores.
T-Mobile upped the ante in the battle for customers in 2012 by offering large discounts on the price of service combined with covering the then-standard fees involved when customers changed providers. AT&T and Verizon matched the move, and churning soared. This put pressure on profits, cash flows and dividends.
The battle moved to a new level when T-Mobile did away with long-term contracts in mid-2015 and successfully marketed that change to move into third place in the carrier rankings, ahead of Sprint. Verizon joined in the move to a monthly plan in August 2015, and AT&T followed suit.
These moves benefit consumers by no longer requiring them to lock into long-term contracts. T-Mobile and Sprint continue to offer financing. While it is somewhat cheaper than Apple's ($15 per month versus $27), it is a lease rather than a purchase.
The move to widely available unlocked phones is likely to further increase churning. Competition may focus more on offering good contracts and services, as companies know that consumers can leave at any time. With less need to attract customers with ultra-low financing, cash flow and thus profits are likely to improve.
The initial financing offer covers the iPhone 6 and 6S. As the company continues to introduce new models, it will have the option to offer an increasingly wide range of financing options to drive consumption.
As the U.S. smartphone market becomes saturated, Apple increasingly looks to developing nations for future growth. By setting up a system that allows consumers to trade in their old phones directly to Apple for new phones, it creates a built-in source of used phones that can be resold overseas.
Basics of the Plan
The company's announcement accompanied its release of the new iPhone 6 and 6S, which are the initial models to be covered under the financing plan. Consumers who buy their phones directly from Apple can choose among several plans; the cheapest is $27 per month for 24 months for a 16-gigabyte iPhone 6S. The payments total $648, which is virtually the same as the phone's sticker price of $649. For $32.45 per month for the same period, the purchaser gets Apple Care support and the right to trade in the new phone for a new one after 12 months. The 24-month contract period would then restart. Customers can also pay off the financing early with no penalty. Because the phones are unlocked, customers contract separately with the cellphone carrier of their choice.Replaces Carrier Financing
Cellphone companies in the United States have traditionally taken on the role of financing phone purchases, providing the buyer with cheap financing in exchange for locking him into 12- or 24-month contracts. With all four of the major companies (AT&T, Verizon, T-Mobile and Sprint) offering service on iPhones, price wars became the norm as success was measured by the number of customers.T-Mobile upped the ante in the battle for customers in 2012 by offering large discounts on the price of service combined with covering the then-standard fees involved when customers changed providers. AT&T and Verizon matched the move, and churning soared. This put pressure on profits, cash flows and dividends.
These moves benefit consumers by no longer requiring them to lock into long-term contracts. T-Mobile and Sprint continue to offer financing. While it is somewhat cheaper than Apple's ($15 per month versus $27), it is a lease rather than a purchase.
The move to widely available unlocked phones is likely to further increase churning. Competition may focus more on offering good contracts and services, as companies know that consumers can leave at any time. With less need to attract customers with ultra-low financing, cash flow and thus profits are likely to improve.
A Good Fit for Apple
Apple has more than $200 billion in cash on hand. The company made 15 small acquisitions during 2015, and despite occasional rumors that it might buy something larger such as electric car company, Tesla, that currently seems unlikely and the cash continues to pile up. That puts Apple in a strong position to provide this type of financing.The initial financing offer covers the iPhone 6 and 6S. As the company continues to introduce new models, it will have the option to offer an increasingly wide range of financing options to drive consumption.
As the U.S. smartphone market becomes saturated, Apple increasingly looks to developing nations for future growth. By setting up a system that allows consumers to trade in their old phones directly to Apple for new phones, it creates a built-in source of used phones that can be resold overseas.
By providing the financing for an unlocked phone, Apple reinforces its position at the heart of consumers' relationships with their electronics. Apple values brand loyalty and seeks to tie its products together; this brings the buyer and seller even closer together. By encouraging consumers to come to a physical Apple store, it can market its other products while selling a smartphone. This is likely to be a profitable move for Apple, with long-term customer loyalty benefits.
Read more: Financing iPhones: The Next Apple Move (AAPL) | Investopedia http://www.investopedia.com/articles/markets/012916/financing-iphones-next-apple-move-aapl.asp#ixzz4EWmQXGTa
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