iPhone Subsidies are Here to Say, But Upgrade Patterns Could Dampen New iPhone Demand (AAPL)

June 14, 2012 1:46 PM EDT
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The Apple-subsidy-cut conspirators (Nasdaq: AAPL) were dealt a blow today after AT&T (NYSE: T) indicated handset subsidies are here for the foreseeable future. That said, customer upgrade patterns could impact sales of the upcoming iPhone.

AT&T indicated that while they will continue to work on pricing, and where possible minimize subsidies, they are just a fact of life in the industry.

While subsidies will be sticking around, other comments from analysts at BTIG suggest upgrade patterns could limit iPhone 5 sales.

First, BTIG discuss the fact that AT&T Mobility President Ralph de la Vega said their customers won't be open to an unsubsidized iPhone, something Leap Wireless's (Nasdaq: LEAP) Cricket unit is betting on with the first pre-paid iPhone.

"We have done a lot of research on this and we have not seen our customers say to us, 'We welcome paying $500-$600 for a phone," de la Vega was quoted as saying.

BTIG notes that while operators know they're stuck with the $200 price point for a iPhone, they want a price cut so they can subsidize less.

On upgrade practices of iPhone users, BTIG notes that AT&T suggested that they've seen very little interest in a program to enable customers that are 6 months into their contract to pay $250 to obtain an early upgrade - effectively bringing the cost of the iPhone to $450. de la Vega indicated most customers wait "till the day they are eligible" before upgrading. He does not expect that customer interest in the early upgrade will increase much with the introduction of the new iPhone this fall.

BTIG notes that this is a negative datapoint for Apple, as AT&T is the largest iPhone customer and 80% of AT&T iPhone sales are upgrades.

On the possibility that AT&T would offer a tiered early upgrade option for customers deeper into their contract - say an effective $350 price point - de la Vega "flatly said no."

"The implication is that a large majority of AT&T iPhones will not be eligible for an upgrade subsidy at any level and AT&T's expectation is that those customers will be unwilling to pay $600 for the new phone," BTIG said.

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