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Morgan Stanley: New carriers to offset impact of longer iPhone upgrade cycles

post #1 of 28
Thread Starter 
A new analysis from investment bank Morgan Stanley downplays investor fears that Apple's iPhone revenue could be impacted by lengthening carrier upgrade cycles and reduced subsidies, noting instead that increased distribution from new carrier partners should sustain iPhone growth.

Analyst Katy Huberty issued a note to investors on Friday addressing the "debate" over carrier subsidies. She identified uncertainty about the sustainability of carrier subsidies as "not a new concern."

Spain's top two carriers, Telefonica and Vodafone, recently announced that they would not subsidize devices for new subscribers. However, Huberty said she believes Spain's situation to be "unique in some ways" because Vodafone has higher acquisition and retention costs than the rest of Europe. The analyst also noted that the "macroeconomic backdrop in Spain is weak" and wireless revenue for the two carriers has been declining.

Apple CEO Tim Cook said as much late last month during a quarterly earnings conference call. He attributed "weak" performance by Apple in Spain to a "terrible economic situation" there. Cook also pointed out that carriers have kept subsidies for their existing customers.

Huberty wrote in her note that she doesn't expect U.S. carriers to drop subsidies. "We believe all three US carriers that currently sell the iPhone are required under contract with Apple to provide specific subsidy levels," she wrote. She also noted that their contracts were "unlikely to expire in the same year," so the carriers weren't set up to make a "joint push" to negotiate new terms.

Morgan Stanley estimates


Carriers are, however, drawing out their upgrade cycle that could nominally affect iPhone sales. For instance, AT&T now requires iPhone subscribers to have finished 20 months of their contract, up from a requirement of 18 months for the iPhone 4 and iPhone 3GS cycles. According to the firm's calculations, every 3-month lengthening of the iPhone upgrade cycle would reduce U.S. shipments by 1.3 million units and global shipments by 3.5 million units during the fourth quarter of 2012.

Huberty sees iPhone growth as robust enough to overcome the longer upgrade cycle, especially since, historically, shipments of Apple's iPhone have continued to grow in spite of fluctuating upgrade terms. The analyst speculated that the addition of T-Mobile, expected to come in late 2012 or 2013, would add three to five million units annually, enough to offset any downsides from the longer cycle.

"AT&T, which has had the iPhone longer than any other carrier, recently lengthened their upgrade cycle for the iPhone from 18 months to 20 months. So far, it does not appear to have a significant impact on demand," she said.

According to Morgan Stanley's calculations, the firm's estimate of 165 million iPhone units in fiscal 2013 could even accommodate up to a 24-month upgrade cycle from AT&T and similar "long-serving iPhone carriers in predominantly post-paid markets."

The second part of Huberty's note explained why the firm's estimates are more conservative than current consensus projections. She pointed out that the June 2012 quarter is only the second quarter since 2008 where "Apple guided both revenue and earnings per share below consensus more than historical averages." The only other time was the September 2011 quarter, when Wall Street mistook Apple's warnings about the iPhone transition.

Huberty also looked to Apple's 10-Q as further evidence supporting Apple's conservative estimates.

"Historically, off-balance sheet commitments for manufacturing and components with a one-quarter lag have had a high correlation (95% r-squared) with revenue," she wrote. "Commitments of $13B disclosed in the March quarter 10-Q imply roughly $39B of revenue for the June quarter, which is only 3% higher than consensus."

The analyst concluded by noting that iPhone channel inventory suggests June quarter shipments of 25-28 million units, compared to the consensus estimate of 30 million. She said a sequential decline was consistent with reports from "Apple's key suppliers," who expect iPhone shipments to drop 15-20 percent quarter over quarter in the June quarter.
post #2 of 28
Quote:
Huberty wrote in her note that she doesn't expect U.S. carriers to drop subsidies. "We believe all three US carriers that currently sell the iPhone are required under contract with Apple to provide specific subsidy levels," she wrote. She also noted that their contracts were "unlikely to expire in the same year," so the carriers weren't set up to make a "joint push" to negotiate new terms.

 

"Joint push" - wouldn't that be illegal?

post #3 of 28
Quote:
Originally Posted by jonshf View Post

 

"Joint push" - wouldn't that be illegal?


For anyone but Apple, probably.

post #4 of 28
This article got me thinking...

20 months at $90 a month.... that's $1800.

Minus the $400 subsidy... that leaves $1400... per customer... for the length of a contract.

Has anyone ever done a breakdown of where that money goes?

We know text messages are a scam and don't cost very much at all... and voice shouldn't either by now. Plus... most people don't come anywhere close to their data cap... so that's money in their pockets too.

How much of my $90 a month goes to pay for actual services... and how much goes to profit?
post #5 of 28
Quote:
Originally Posted by Michael Scrip View Post

This article got me thinking...
20 months at $90 a month.... that's $1800.
Minus the $400 subsidy... that leaves $1400... per customer... for the length of a contract.
Has anyone ever done a breakdown of where that money goes?
We know text messages are a scam and don't cost very much at all... and voice shouldn't either by now. Plus... most people don't come anywhere close to their data cap... so that's money in their pockets too.
How much of my $90 a month goes to pay for actual services... and how much goes to profit?

EBITDA as a % of Service Revenue for AT&T Wireless Segment for 1Q2012 was 41.6%.  EBITDA is defined as Operating Income Before Depreciation and Amortization. Annual Service EBITDA Margin is calculated as the sum of quarterly EBITDA divided by the sum of quarterly Service Revenues. 

 

Segment Operating Income Margin was 27.2% for AT&T Wireless Segment for 1Q2012.

post #6 of 28

Looks like a large number of AT&T iPhone customers will be leaving for T-Mobile or Verizon or Sprint in Q4.

post #7 of 28
According to the firm's calculations, every 3-month lengthening of the iPhone upgrade cycle would reduce U.S. shipments by 1.3 million units and global shipments by 3.5 million units during the fourth quarter of 2012.

I wonder whether they had taken into consideration the fact that Apple now introduce the iPhone at different time frames throughout the year so that there is a consistency in the number of phone sold and whatever the loss in sale in the US could easily be made up,by the rest of the world.
post #8 of 28
Quote:
Originally Posted by MacBook Pro View Post

EBITDA as a % of Service Revenue for AT&T Wireless Segment for 1Q2012 was 41.6%.  EBITDA is defined as Operating Income Before Depreciation and Amortization. Annual Service EBITDA Margin is calculated as the sum of quarterly EBITDA divided by the sum of quarterly Service Revenues. 

 

Segment Operating Income Margin was 27.2% for AT&T Wireless Segment for 1Q2012.

EBITDA as a % of Service Revenue for Verizon Wireless Segment for 1Q2012 was 46.3%.

 

Segment Operating Income Margin was 28.6% for Verizon Wireless Segment for 1Q2012.

post #9 of 28
I've upgraded on 24 month cycle, maybe now 28 months this time around because it's possible Apple pushed back their upgrade cycle from Summer to Autumn. Upgrading at 18 months hasn't made sense yet, I'd only do that if the phone broke and I'm upgrade eligible, rather than repairing it.
post #10 of 28

For consumers, many will weigh the impact of early upgrade costs against the marketed benefits of the new iPhone.  Given the type of uptake Apple had with the 4S, chances are pretty good that people will buy, regardless of whether they're upgrade eligible, when this next iPhone is released.  I'm one of those consumers.  My wife, because we're on the family plan and I am the primary, is behind on upgrades.  When the new iPhone launches, either she'll take my upgrade or I'll get the new phone and she'll take my 4S and potentially pass down her 4 to one of our kids.

post #11 of 28

makes sense - AT&T sucks ... independent of the phone using its "service."

post #12 of 28

18-20 months?  I was able to upgrade my iPhone each year on release day.  

post #13 of 28
Quote:
Originally Posted by dgrayson98 View Post

Looks like a large number of AT&T iPhone customers will be leaving for T-Mobile or Verizon or Sprint in Q4.

 

 

why? i'm on AT&T and the only reason i would go to verizon is for family data bundles.

 

sprint is too expensive for family plans. T-Mo is about the same price but their coverage is crap

post #14 of 28
Quote:
Originally Posted by Michael Scrip View Post

This article got me thinking...
20 months at $90 a month.... that's $1800.
Minus the $400 subsidy... that leaves $1400... per customer... for the length of a contract.
Has anyone ever done a breakdown of where that money goes?
We know text messages are a scam and don't cost very much at all... and voice shouldn't either by now. Plus... most people don't come anywhere close to their data cap... so that's money in their pockets too.
How much of my $90 a month goes to pay for actual services... and how much goes to profit?

how much of the iphone's cost goes to pay for the device and how much for profit? now that the iphone is on 3/4 US carriers and owned by pretty much anyone who is willing to buy it the next step is to start cutting costs

post #15 of 28

Contracts are crap anyway. I simply sell the old iPhone then save up the rest to buy unsubsidized directly from Apple. I use my iPhone and iPad more than a computer, so I figure the extra expense is justified. Plus, this way, I won't be supporting crappy AT&T service more than what's necessary.

 

What we need is a third type of company. It is obvious that the outdated analog phone mentality of carriers cannot cope with today's data needs. I don't know the how, but I do know we have the need.

Originally Posted by Granmastak: Labor unions managed to kill manufacturing a long time ago with their unreasonable demands. Now the people they were trying to protect, are out of a job.
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Originally Posted by Granmastak: Labor unions managed to kill manufacturing a long time ago with their unreasonable demands. Now the people they were trying to protect, are out of a job.
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post #16 of 28
Quote:
Originally Posted by ghostface147 View Post

18-20 months?  I was able to upgrade my iPhone each year on release day. 

You can get that if you spend enough per month. The base line for a smart phone was 18 months. If you paid more a month than a certain threshhold, then you can get an annual upgrade. I think it was $99/mo last I checked.
post #17 of 28
Quote:
Originally Posted by uguysrnuts View Post

Contracts are crap anyway. I simply sell the old iPhone then save up the rest to buy unsubsidized directly from Apple. I use my iPhone and iPad more than a computer, so I figure the extra expense is justified. Plus, this way, I won't be supporting crappy AT&T service more than what's necessary.

 

What we need is a third type of company. It is obvious that the outdated analog phone mentality of carriers cannot cope with today's data needs. I don't know the how, but I do know we have the need.

How much does the wireless provider charge you per month and for what plan when you provide your own iPhone?

post #18 of 28
Quote:
Originally Posted by JeffDM View Post


You can get that if you spend enough per month. The base line for a smart phone was 18 months. If you paid more a month than a certain threshhold, then you can get an annual upgrade. I think it was $99/mo last I checked.

No wonder my wife gets an annual upgrade every-year, for some reason she's the main account holder even though I pay over 240/month for 4 lines

post #19 of 28

$220 for family plan(four lines, three of them are iPhones). I only buy through AT&T when naturally the contract is about to expire. Don't get me started on switching, because I've been with Verizon and Sprint (pre-iPhone), and they both suck as much as AT&T.

 

IMO, the carriers should stick with voice, since they are all either unwilling or simply can't figure out how to provide data services without bankcrupting their customers. I am tired of paying $45 extra for capped data and slow speeds.

 

Quote:
Originally Posted by MacBook Pro View Post

How much does the wireless provider charge you per month and for what plan when you provide your own iPhone?

Originally Posted by Granmastak: Labor unions managed to kill manufacturing a long time ago with their unreasonable demands. Now the people they were trying to protect, are out of a job.
Reply
Originally Posted by Granmastak: Labor unions managed to kill manufacturing a long time ago with their unreasonable demands. Now the people they were trying to protect, are out of a job.
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post #20 of 28
Quote:
Contracts are crap anyway. I simply sell the old iPhone then save up the rest to buy unsubsidized directly from Apple. I use my iPhone and iPad more than a computer, so I figure the extra expense is justified. Plus, this way, I won't be supporting crappy AT&T service more than what's necessary.
Why? Bringing your own +$600 phone and getting a month to month plan is no less expensive than getting a 2 year contract with a $200 phone. The only difference is you are in a two year contract (and you save $400).
If you wanted to change to Verizon/Sprint, you 'd have to spend another +$600 for a new phone. You could recoup some of that by selling the old one but why?
Edited by Chris_CA - 5/11/12 at 4:43pm
post #21 of 28

My wife upgraded to a 64GB iPhone from a crap Sony Ericsson. It would have been $399 for the iPhone. However, since she already exhausted her upgrade privilege (the Sony phone had to be replaced twice, and basic warranty already expired), we had to shell out $650 instead.

 

Why 64 and not 16 or 32? Well, I already had the iPhone 4, so we basically traded phones after the upgrade (with me swallowing the upgrade bill of course). As I am a heavy iOS user, I am actually using two-thirds of the storage space and had to delete some apps and music.

 

 

Quote:
Originally Posted by Chris_CA View Post

uote] Contracts are crap anyway. I simply sell the old iPhone then save up
the rest to buy unsubsidized directly from Apple. I use my iPhone and iPad
more than a computer, so I figure the extra expense is justified. Plus, this
way, I won't be supporting crappy AT&T service more than what's
necessary.
Quote:
Why? Bringing your own +$600 phone and getting a month to month plan is no
less expensive than getting a 2 year contract with a $200 phone. The only
difference is you are in a two year contract (and you save $400).
If you wanted to change to Verizon/Sprint, you 'd have to spend another
+$600 for a new phone. You could recoup some of that by selling the old one
but why?

Edited by uguysrnuts - 5/11/12 at 9:47am
Originally Posted by Granmastak: Labor unions managed to kill manufacturing a long time ago with their unreasonable demands. Now the people they were trying to protect, are out of a job.
Reply
Originally Posted by Granmastak: Labor unions managed to kill manufacturing a long time ago with their unreasonable demands. Now the people they were trying to protect, are out of a job.
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post #22 of 28

I do hope more companies like this flourish to force the carriers to rethink their data strategy. I am not sure how FreedomPop's solution is going to pan out, but at least it's something.

 

http://reviews.cnet.com/8301-19512_7-57432503-233/freedompop-bringing-free-4g-service-to-iphones/

Originally Posted by Granmastak: Labor unions managed to kill manufacturing a long time ago with their unreasonable demands. Now the people they were trying to protect, are out of a job.
Reply
Originally Posted by Granmastak: Labor unions managed to kill manufacturing a long time ago with their unreasonable demands. Now the people they were trying to protect, are out of a job.
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post #23 of 28
Quote:
I have a 64GB iPhone 4S which is $399 with contract.
And $849 non-contract, which is what you wrote you purchase.
Quote:
Like I said, I do upgrade through AT&T when it makes sense.
But you did write, "I simply sell the old iPhone then save up the rest to buy unsubsidized directly from Apple".
Now I'm confused.
Do you have a contract with subsidized phone or not?
If a non-subsidized phone from Apple is a better deal, why do you have a contract? Or do you?
post #24 of 28
Quote:
Originally Posted by Chris_CA View Post


And $849 non-contract, which is what you wrote you purchase.
But you did write, "I simply sell the old iPhone then save up the rest to buy unsubsidized directly from Apple".
Now I'm confused.
Do you have a contract with subsidized phone or not?
If a non-subsidized phone from Apple is a better deal, why do you have a contract? Or do you?

Exactly.  Inquiring minds want to know!

post #25 of 28

1 - we have a family plan (so yes, contract!)

 

2 - my wife blew her chance at getting the iPhone for $399 by upgrading to a crappy Sony Ericsson phone (which had to be replaced twice), hence the "subsidized" phone cost $650.

 

Quote:
Originally Posted by Chris_CA View Post


And $849 non-contract, which is what you wrote you purchase.
But you did write, "I simply sell the old iPhone then save up the rest to buy unsubsidized directly from Apple".
Now I'm confused.
Do you have a contract with subsidized phone or not?
If a non-subsidized phone from Apple is a better deal, why do you have a contract? Or do you?
Originally Posted by Granmastak: Labor unions managed to kill manufacturing a long time ago with their unreasonable demands. Now the people they were trying to protect, are out of a job.
Reply
Originally Posted by Granmastak: Labor unions managed to kill manufacturing a long time ago with their unreasonable demands. Now the people they were trying to protect, are out of a job.
Reply
post #26 of 28

I'm touched.

 

There is probably no monetary advantage (between subsidized and unsubsidized), other than sticking it to AT&T. But this is what AT&T may have wanted all along in the first place.

 

Quote:
Originally Posted by MacBook Pro View Post

Exactly.  Inquiring minds want to know!

Originally Posted by Granmastak: Labor unions managed to kill manufacturing a long time ago with their unreasonable demands. Now the people they were trying to protect, are out of a job.
Reply
Originally Posted by Granmastak: Labor unions managed to kill manufacturing a long time ago with their unreasonable demands. Now the people they were trying to protect, are out of a job.
Reply
post #27 of 28

I stay completely off contract. My wife and I do the BYOD with Straight Talk and spend $45 a month for unlimited talk, text and data. (The data is reputed to actually be 2 gigs a month.) I have an iPhone 4 and she still has the iPhone 3GS.

 

Clearly Apple doesn't do as well in markets where prepaying for service is the norm. It was shown that Apple takes a thumping for example in Eastern Europe. We already know that some of the reason Nokia and RIM are even still alive are because they can push out $200 smartphones with no subsidy in places like India.

 

Apple has done well with the subsidy model. However it is clear carriers are either questioning it or struggling with it and thus have started cutting corners. Contract terms are being extended a few months, upgrade fees are being added per line, little perks are being eliminated, etc. There has even been talk that Apple is being subsidized via Android phone sales in terms of carriers charging more for Android phones to avoid having to eat more of the Apple subsidy.

 

This article for me basically attempts to justify an unsustainable model. That doesn't mean Apple makes a terrible phone or that people will want to stop buying it for something else. The reality is simply that Europe is going back into recession, the U.S. may or may not follow, and large chunks of the world already do not subsidize phones. It doesn't mean that Apple still won't capture the majority of profits within the cell phone market. It does mean margins are under pressure for everyone and that will likely be less money to become profits for most companies. The low hanging fruit and easy growth will largely be gone and future growth will have to be legitimate, not subsidized with the promise of future profits for the carriers.

 

There likely will be a lot of consolidation, pressure on profits and an inability to control pricing for much of the market. I don't think Apple is above that. One of the interesting thing that no one discusses much is legacy costs. The positives of an "ecosystem" become negatives quickly if profits plummet and you are stuck with legacy costs. Most phone carriers have adopted or joined ecosystems that they do not have to directly fund. Nokia for example has largely chucked Meego and Symbian for Windows Phone. All of the Android providers obviously let Google handle a large number of services for them. We saw back when Apple was struggling with the Mac that having to roll your own everything can be very expensive when there isn't a huge tide of profits to support it all.

"During times of universal deceit, telling the truth becomes a revolutionary act." -George Orwell

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"During times of universal deceit, telling the truth becomes a revolutionary act." -George Orwell

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post #28 of 28

EBITA is not a good way to think about how much of your $90 goes to paying for your service.  

 

You definitely have to think about interest and depreciation as a "cost to my service"  in the wireless market, there is going to be an interest cost which you can just think of as the cost of investing in asset purchases to provide wireless services (Cell phone towers, networks systems) which most people would prefer over an upfront fee to join a phone company so they can finance capital expenditures.  

 

Depreciation is extremely important to include when thinking about how much of your service fee actually pays for service.  Accounting principles are based on the idea that an asset that provides service is eventually going to be worthless in the long run, which makes since in a technologically driven industry.  A company put up cash, added an asset to the balance sheet, prepaid for a cost of what it takes to provide you with service, however you want to think about it, and that upfront cost (Asset on the balance sheet) has to be spread over a period of time (someones service) when thinking about how much of your fee goes to paying for service.

 

Now of course its hard to measure what asset classes are going to be purchased and the rate of which a companies various assets can depreciate according to the IRS, so it still should not be used as a perfect number, but to a fairly large degree should be considered.

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