Wireless companies may help you buy that new iPhone after all.
Way before Apple came up with its pricey nearly $1,000 iPhone X, wireless companies had already moved into the business of creating credit plans so customers could bear more of the cost of their own phones.
But now that finance plan could backfire, if carriers get into what already looks to be the start of a competitive battle to one-up each other with costly promotions for the new Apple iPhone 8s and iPhone X. Analysts say it's something the carriers had vowed they would not do, and it's something consumers would love.
"They said they wouldn't be, but within 24 hours of the announcement you were already seeing promotions hit the tape," said Amy Yong, an analyst with Macquarie.
"Broadly speaking, they moved away from subsidizing to equipment installment plans," Yong said. "The idea is after a few years, you own your own phone. This is literally a three or four-year phenomena. Subsidizing had become an ugly word among the investment community. It just meant there was more cash flow burn among carriers."
Yong said it's unclear what will be offered on the iPhone X but if one carrier "cracks," the rest will follow. "They would like to not pay for your phone," Yong said.
She said initial promotions include T-Mobile giving $300 in credit with an iPhone 6 trade-in plus three months of free Apple Watch service, she said. Verizon is also giving a $300 trade-in credit, and AT&T announced a buy one, get one on the iPhone 8 but nothing on X. The iPhone 8 starts at $699.
"It's really just about promotion activity," said Mark Stodden, senior vice president at Moody's. "When there's a new phone launch, the carriers become very defensive about protecting their market position. They have to respond, and there's so much sensitivity from Wall Street on quarterly subscriber numbers and market share and less on cash flow because cash flow is so noisy. That may have some impact on their behavior."
It used to be that wireless companies such as AT&T and Verizon subsidized a big chunk of your phone's cost in exchange for locking you into a contract. In the past you also paid a subsidy fee for that phone each month, plus there were more expensive charges for roaming, data and texts.
Now, there's a good chance you are making a monthly installment payment on what is essentially a consumer loan for your phone. For instance, on an iPhone 7 that payment could be about $25. If you decide to break your contract but still want that phone, you have to pay the balance. But if you make your two years of payments, the phone is yours.
That's called an equipment installment plan, charging you no interest but keeping you loyal to your phone carrier, or so they hope. Well over half of customers are now in installment plans, analysts say.
Jefferies analyst Mike McCormack expects the launch of the new iPhone 8 models and the iPhone X to drive consumers to look for upgrades, but he expects the installment plans mean consumers will hold on to their old phones longer.
The reason is that after two years of paying the monthly payment, phones are paid off and consumers see their bill drop. It used to be consumers who held phones for three years or more had paid off the equivalent of the phone's costs through fees, and carriers were just raking in the subsidy fees.
"We're seeing a decline in upgrade rates, and part of that decline in upgrade rates is because people paid off their phones. Your bill will drop by whatever the equivalent payment was … what we're finding is customers are interested in having a lower bill," said McCormack.
Stodden said the installment plans actually are better for wireless companies because there is less churn. "That's actually really good for the carriers. One, the phones cost them a lot of money. The fewer phones they need to buy the better, and two, every time you get a new phone it's an opportunity to evaluate whether you want to stay with that carrier," he said.
McCormack said the installment plans are working out for the carriers but make no sense if they do "crazy things," like offer to buy back used phones, give away free phones or go back to giving subsidies. "That's been the biggest fear … call it irrational or competitive behavior."
"The margins have been tremendous to the extent customers are paying for their own phone," he said.
Analysts say T-Mobile has been the most aggressive, and it's been behind some of the biggest promotions. For instance, it offers Netflix to its customers for free.
"Just yesterday, T-Mobile was talking about this at the Goldman Sachs conference," Stodden said. "When they do a high-profile device promotion, the rest of the industry copies them and you don't really get an advantage from it. Device promotions don't really work because the industry is so competitive."
"When you had subsidies, it was opaque," he said. "The customer didn't really know how much the carrier was absorbing or subsidizing, as far as the phone cost. Now that you split them apart, you have a more transparent market."
Wireless companies have handled these installment "loans" in different ways. Verizon was the last carrier to adopt these plans, but it was the only U.S. company so far to package them as a public security, meaning bundles of cellphone loans have been sold on Wall Street as asset-backed securities. Other carriers also securitized but have used bank lending to cover the receivables, and the accounting treatment is more favorable, said McCormack.
But these types of securitizations are expected to grow beyond Verizon. Sprint, which has numerous leases, has discussed doing it as well, said Stodden. As of June, there was an estimated $20 billion of securitized receivables outstanding, Stodden said.
According to Moody's, securitizing the cellphone receivables has been popular in Japan.
Moody's in a recent report said the loan pools in the mobile phone financing securities span the credit spectrum and a significant number of mobile phone finance loans are to customers with poor or little credit history.
McCormack said that the Verizon securities have been successful so far, but the idea has never been tried in a financial downturn.
Moody's analysts said a positive is that consumers are heavily reliant on their phones and would be less inclined to discontinue phone payments over other things.
"The credit strength of mobile phone financing ABS depends on a number of unique features, in addition to the credit quality of borrowers. For instance, the importance of mobile phones to their users may help maintain the willingness of borrowers to repay loans, while loan performance could deteriorate if a wireless carrier's operations were shut down and phones were no longer useful," according to Moody's.