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Carrier 'No-Subsidy' Plans a Positive for Apple (AAPL), Macquarie Says

May 12, 2014 12:49 PM EDT
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Macquarie analyst Ben Schachter sees both Apple (NASDAQ: AAPL) and U.S. carriers benefiting from an iPhone 6 that is offered via a zero down “no-subsidy” model.

Schachter notes handset subsidies are shrinking in the US telecom market, as the Big-4 carriers have each introduced new ‘no-subsidy’ plans. These plans offer users high-end phones with zero up-front cost. Consumers pay for the phones via monthly instalment costs. Carriers like the plans because they no longer subsidize the cost and the higher-end phones also drive higher data usage fees.

The analyst highlighted 5 key points from the 'no-subsidy' plans:

1) Zero upfront costs will expand iPhone 6’s target market. While the life-time cost can be ~10-15% more for consumers, having no upfront costs will make high-end devices such as the iPhone 6 available to a broader market.

2) U.S. carriers favor the no-subsidy model. With this model, carriers do not have to pay a subsidy to manufacturers. We believe that all the US carriers expect to meaningfully increase the % of activations via this model in the coming quarters.

3) We expect the carriers to aggressively market the iPhone 6. We have recently spent time with carrier managements and we believe they are expecting strong pent-up demand for the large screen iPhone. Carriers have disclosed that larger screen devices have higher consumer data usage than smaller screen phones. For this reason, we expect T & VZ to push the iPhone 6 aggressively.

4) Impact on upgrade/replacement cycle unclear. Perhaps the biggest potential negative about the movement toward the no-subsidy model is that it could lengthen the upgrade cycle and/or drive more used phone sales.

5) Range of monthly cost to consumers for an iPhone 6. Under the subsidy model we expect the all-in cost to be ~$75/month, vs. the installment model monthly cost of ~$103.

"The bottom line is that we are incrementally more positive on AAPL and expect that US carriers moving to the equipment installment plan model will benefit both AAPL and the carrier," Schachter said. He reiterated an Outperform rating and price target of $665 on Apple.

For an analyst ratings summary and ratings history on Apple click here. For more ratings news on Apple click here.

Shares of Apple closed at $585.54 yesterday.



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