Did T-Mobile Just Change Apple's World?
Dec 10th 2012 6:15PM
Updated Dec 10th 2012 6:24PM
T-Mobile USA, the Deutsche Telekom (NSADAQOTH: DTEGY) subsudiary trying to desperately to remain relevant in the world of wireless, unleashed a couple of news items in the past week that could, potentially, change the smartphone landscape here in the States. That may sound a bit extreme, particularly since we're talking about T-Mobile, a wireless service provider whose very existence was a legitimate concern only months ago.
So what's all the hullabaloo? T-Mobile's German parent has committed about $10 billion over the next three years, primarily to build out its LTE network. Thanks to the failed sale of T-Mobile to AT&T earlier this year, T-Mobile found itself with new mobile licenses, cash for a deal with rival Verizon for more spectrum, and a long-term cell tower deal with Crown Castle.
Now, the really big news
That's all great stuff for Deutsche Telekom investors, enjoying the 8.1% dividend, but there's little else as its stock meanders from flat to slightly down year to date. The announcement that really gets the speculation ball rolling is news that T -Mobile signed a deal to finally offer Apple's iPhones, beginning in early 2013. The terms of the deal, however, are unique here in the States. T-Mobile will not subsidize iPhones, as does virtually every other domestic wireless carrier.
Though entry-level iPhone models are $199 at the Apple Store, that cost applies are only when smartphone users choose a data plan from AT&T, Sprint Nextel , or Verizon. Ah, but the carriers purchase iPhones in advance, so Apple gets the revenue regardless, right? True. Sprint Nextel, for example, had to commit to $15.5 billion worth of Apple products over four years for the deal to work.
According to T-Mobile USA CEO John Legere, "This is not a volume commitment the size of what Sprint agreed to or anything close to it." Nor could T-Mobile commit to that many iProducts, considering its intentions are for smartphone consumers to pay the entire cost. And with a low-end iPhone running about $650, even with the discounted data and 20-month payment plan T-Mobile will offer, that's going to be a tough pill to swallow for users more comfortable with $199 for an iPhone, and sometimes even less for a Nokia Lumia, a Google Nexus, or a Samsung Android handset.
The carriers love it!
When I heard of T-Mobile's non-subsidized smartphone strategy, I immediately recalled comments from Verizon and AT&T representatives from earlier this year. As Nokia was introducing its "new" Lumia running the Windows 8 OS, both carriers made it clear they were rooting for it to succeed. Why? Because, with Apple's dominant position in the market, it's been able to dictate its own terms -- though with Google, Samsung, and Nokia in the picture, the winds of change are picking up.
What T-Mobile's new stance says is maybe Apple, along with all the other smartphone alternatives out there, won't continue to call all the shots going forward. Competition, exactly what AT&T and Verizon mentioned several months ago, is beginning to work for the carriers -- and that's a significant shift in mindset. And with nearly two-thirds of Apple's profit derived from iPhones, much of it subsidized by domestic carriers (though international sales are significant, of course), there's a lot at stake.
What happens if the big boys in the wireless space decide to follow T-Mobile's lead after existing smartphone contracts end? One scenario is that manufacturers such as Nokia that currently offer cost-effective, entry-level phones all over the world become a viable alternative for consumers unable, or unwilling, to part with $600 for a mid-level smartphone.
Another scenario, and much more likely should the non-subsidies come to pass, is that higher-end product lines such as the iPhone 5, Galaxy III, and Lumia 920 are supplemented with low cost alternatives. Nokia's already producing smartphones in markets around the globe that fit scenario No. 2. For example, Nokia's Lumia 620 just rolled out to international markets, with a non-subsidized price tag of $249.
It should come as no surprise that change has been a constant in the wireless industry. Any market that grows this explosively is always in flux -- there's no avoiding that. But if T-Mobile's shift in strategy takes hold -- and you know AT&T, Sprint, and Verizon would love nothing more -- we're going to find out what length consumers will go to for their smartphones, not to mention which manufacturers are willing to adapt to a new world of entry-level smartphone alternatives.
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The article Did T-Mobile Just Change Apple's World? originally appeared on Fool.com.Tim Brugger has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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