How Come Apple Is Taking Aim At Wireless Phone Companies Now?

Convergence means never having to say you're sorry for terminating longstanding relationships. With the smartphone market reaching saturation and two thirds of Apple's revenues derived from it, the company has to identify new ways to keep growing. Owning more of the wireless interface is one of them. As that great entrepreneur George Washington once said, 'no entangling alliances.' JL

Thomas Gryta and Ryan Knutson report in the Wall Street Journal:

Tech companies have complained in recent years about the cost of wireless service. While a new iPhone 6s costs $649, two years of paying Verizon for a 3 gigabyte monthly data plan is more than twice that. Apple’s move is threatening, in that it erodes the carrier’s relationship with the customer.
Apple Inc. AAPL 2.20 % launched a broadside Wednesday against wireless phone companies, saying it will for the first time finance iPhone sales directly to customers without requiring them to be tied to any particular carrier.
The offer, revealed along with a new line of products, marks a sharp turn in the relationship between Apple, which needs to sell tens of millions of new phones each year, and such wireless giants as AT&T Inc., and Verizon VZ 0.15 % Communications Inc., which rely on the iPhone to attract customers to their cellular plans in the highly competitive U.S. market.
Carriers have been instrumental in the success of the iPhone, the ubiquitous device that accounted for about 56% of Apple’s $183 billion in sales last year. But the new finance offer reflects competing pressures on Apple, which seeks more buyers to upgrade their phones each year, and the wireless carriers, which look to keep their customers from switching to a rival.
Apple will offer a monthly fee of $32.41 over 24 months for its cheapest iPhone model under the new program announced Wednesday at the latest iPhone launch. The deal allows customers to get a new device each year, as well as select their carrier with each upgrade, according to the Apple website. Denny Strigl, Verizon’s former chief operating officer, said Apple’s move is a sign it wants to wrest control of customers from wireless carriers. Companies that control the customer relationship have more leverage in pricing and sales, he said.
If customers go to Apple to finance their phones and choose a carrier, for example, Apple will be able to steer that customer’s decision, and possibly guide them toward a carrier with a cheaper service, according to Mr. Strigl.
Wireless carriers have been replacing traditional two-year contracts that restrict upgrades with installment plans that spread the price out over two years. That can be painful for Apple because those plans make clear the cost of the device, prompting some customers to delay buying the latest iPhone.
The average upgrade time in the U.S. has risen from 18.2 months in 2010 to an estimated 26.3 months in 2015, according to data from telecom consultant Chetan Sharma.
Apple rolled out two new smartphones Wednesday—the iPhone 6s and 6s Plus. They are the same size as the current iPhone 6 and 6 Plus but have improved cameras and a “3-D Touch” feature that allows people to interact with smartphone screens in new ways.
It is unclear whether the new features will draw the same customer response as the iPhone 6 and 6 Plus. In the three full quarters those phones have been sold, iPhone revenues have grown more than 50% from the same period a year earlier.
This isn’t the first time that Apple has veered into the carriers’ territory. Last year, it launched an iPad with a cellular SIM card that allowed customers to select their wireless carrier on the spot.
Apple’s new iPhone program, which includes a more robust warranty, doesn’t provide any savings on the device. For a 16-gigabyte iPhone 6s, the payments would end up being about $778, which is equal to the combined $649 price of the phone and the included $129 Apple Care coverage. An iPhone 6s Plus with 128 gigabytes of storage costs $949.
“The simple truth is, on an installment plan, any iPhone you want is pretty affordable,” Apple’s senior vice president of world-wide marketing Phil Schiller said Wednesday.
A Verizon spokesman said the company “would love to sell them the device,” but the most important thing is for customers to choose Verizon for wireless service.
Mike Sievert, chief operating office of T-Mobile TMUS 0.53 % praised Apple’s move, saying it would allow customers to try out other carriers.
Sprint S -2.03 % Chief Executive Marcelo Claure said in an interview that the tension between carriers and Apple is less about customer control and more about two year contracts, which discouraged customers from buying new iPhones each year.
“Apple is trying to do nothing more than shorten the cycle so they can sell more iPhones,” he said, adding that he believed that’s what customers want, too. Since Sprint launched an annual upgrade plan last month, 90% of new customers have bought it.
The largest wireless carriers have been cutting prices and changing how they structure their cellular and data plans as they compete in a U.S. market where most people have a cellphone and don’t often switch carriers. The companies have moved away from subsidizing smartphones to using installment plans where customers generally pay the cost of the phone over two years.
Tech companies have complained in recent years about the cost of wireless service. While a new iPhone 6s costs $649, two years of paying Verizon for a 3 gigabyte monthly data plan is more than twice that. And tech companies have been exploring ways to compete in the wireless market. Google Inc. GOOG 1.41 % earlier this year launched its own wireless service called Project Fi, which resells wireless service from T-Mobile and Sprint under the Google brand.
For Apple, a financing plan that allows upgrades after 12 months may help lock in a group of customers that automatically take the new phone each year, thus stabilizing a core of phone sales. That is important as smartphones improve and consumers are inclined to keep their phones longer.
“Apple’s move is perhaps a bit threatening, in that it incrementally erodes the carrier’s relationship with the customer,” said Craig Moffett, senior analyst at MoffettNathanson. But it does have a silver lining, Mr. Moffett said, because carriers typically lose money each time they sell a handset. Wireless service is the real cash cow, he said.
Ultimately, the shift could help smaller carriers, like T-Mobile and Sprint, which are fighting to steal customers from the dominance of AT&T and Verizon, Macquarie Research analyst Kevin Smithen said.
“But churn may increase for everyone,” he said.