Cheap IPhone Could Lure More AT&T Users Away to T-Mobile

Aug. 8 (Bloomberg) -- John Legere, chief executive officer of T-Mobile US Inc., talks about the company's performance, price plans and network service. Legere speaks with Emily Chang on Bloomberg Television's "Bloomberg West." (Source: Bloomberg)

Apple Inc. (AAPL)’s debut of the newest iPhone on all four top U.S. carriers at the same time will test the loyalty of customers at AT&T Inc. and Verizon Wireless.

The latest version of the iPhone, due to be unveiled tomorrow, will be the first to come out on T-Mobile (TMUS) U.S. Inc. simultaneously with its bigger rivals.

That means heightened competition for the most popular smartphone in U.S. history -- right from the get-go. AT&T and Verizon Wireless, which used to be the only iPhone carriers, are now in jeopardy of losing users to T-Mobile’s more flexible service plans in an already saturated U.S. wireless industry beset by slowing growth.

“It’s a much more even playing field than it was last year, when AT&T (T) had more of an advantage,” said Roger Entner, an analyst at Recon Analytics in Dedham, Massachusetts. T-Mobile is “in the right place at the right time with the right product.”

Adding to the price competition, Apple will introduce a less expensive iPhone along with an upgrade of the iPhone 5 tomorrow, people with knowledge of the matter have said.

That may convince consumers to pay in full for a new phone, rather than sign a two-year subscription to get a discount, giving an added edge to T-Mobile, which doesn’t require users to sign a contract.

Photographer: Scott Eells/Bloomberg

A T-Mobile USA Inc. employee pulls the cover off of an Apple Inc. iphone 5 display at a retail location in New York on April 12, 2013. Close

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A T-Mobile USA Inc. employee pulls the cover off of an Apple Inc. iphone 5 display at a retail location in New York on April 12, 2013.

“Getting a lower-cost iPhone could make a big difference for T-Mobile,” Entner said.

Exclusivity Ends

AT&T had exclusive rights to the iPhone until 2011, when Basking Ridge, New Jersey-based Verizon Wireless started selling the device. Later that year, Sprint Corp. (S) also got the iPhone.

Apple is also expanding its iPhone distribution overseas. The Cupertino, California-based company is close to a deal with China Mobile Ltd. (941) to sell the device through the world’s largest carrier, a person with knowledge of the matter said last week.

T-Mobile, controlled by Deutsche Telekom AG (DTE), became a larger No. 4 carrier when it combined with MetroPCS Communications Inc. in May. T-Mobile started selling previously released models earlier this year, and now it is participating in its first iPhone introduction after missing the previous six.

AT&T, with its large iPhone customer base and compatible network technology, has become the target of T-Mobile’s advertising attacks, which promote the smaller company as an “un-carrier” that doesn’t do business like its rivals. This year, T-Mobile became the first major U.S. carrier to offer phones with interest-free financing.

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An employee displays an Apple Inc. iPhone for a photograph at an AT&T Inc. store in Manhattan Beach, California. Close

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An employee displays an Apple Inc. iPhone for a photograph at an AT&T Inc. store in Manhattan Beach, California.

Paying Separately

T-Mobile also dropped contract plans, letting customers switch to another carrier at any time they desire, without paying a penalty. On the downside, T-Mobile’s customers have to buy their phones separately -- and the iPhone 5 costs $649 without a contract.

Even with monthly financing, that cost, combined with the wireless subscription, can make a T-Mobile plan as expensive as its competitors’. If Apple offers a less expensive version of the iPhone, T-Mobile’s service will be all the more attractive, said Tero Kuittinen, New York-based head of sales and marketing for Alekstra Oy, which helps businesses manage telecommunication costs.

“The cheaper iPhone might fit T-Mobile’s budget plan like a glove,” he said.

The new approach is already working. In the second quarter, T-Mobile added 688,000 monthly subscribers, surpassing the 551,000 for Dallas-based AT&T. The smaller carrier’s momentum is continuing, Jennifer Fritzsche, an analyst at Wells Fargo & Co., said in a note last week, citing information from distributors. She doubled her estimate for T-Mobile third-quarter subscriber gains to 425,000.

T-Mobile rose less than 1 percent to $24.74 at the close in New York. AT&T climbed less than 1 percent to $33.63.

Unlimited Sprint

Sprint, the third-largest U.S. carrier, may also get a boost from new iPhones after introducing plans in July that offer unlimited calls, texting and data use for as long as subscribers have their phone lines. The idea was to stand out from the bigger rivals, which have been switching to tiered plans -- where customers pay more when they use more data.

SoftBank Corp. (9984), the Tokyo-based mobile-phone company, took control of Sprint in July for $21.6 billion, giving the Overland Park, Kansas-based company more funding to strengthen its network.

To prevent an exodus, AT&T and Verizon introduced their own offers this month to let customers upgrade phones more frequently and finance them over time, options T-Mobile had already introduced.

“AT&T and Verizon would not be trying to mimic T-Mobile plans, at least superficially, if they weren’t a bit nervous,” said Kuittinen.

Defection Spike

AT&T experiences a spike in customer defections whenever a competitor starts selling the iPhone for the first time, Ralph de la Vega, the company’s mobility chief, said in July. The effect is always temporary, he said.

Emily Edmonds, an AT&T spokeswoman; Torod Neptune, a Verizon Wireless spokesman; and Scott Sloat, a Sprint spokesman, declined to comment on how the iPhone may affect their subscriber rolls.

“We are looking forward to Apple’s announcement,” T-Mobile Chief Marketing Officer Mike Sievert said in a statement. “We plan to continue being highly competitive.”

People with iPhones tend to be more loyal to their carrier than users of other phones, says Michael Cote, an industry strategist with the Cote Collaborative in Chicago.

Cost Sensitivity

One area where that loyalty might be vulnerable is cost, he said.

“Assuming it is a lower-priced iPhone, it should, in theory, benefit T-Mobile more than the others,” Cote said. “If you look at the rate of people leaving AT&T for T-Mobile, the ratio is already bad, and this could exacerbate that.”

T-Mobile’s bigger competitors still have advantages that may make users hesitant to abandon them. All of them can offer the fastest high-speed Internet connections in more places than T-Mobile can.

Verizon Wireless has the largest network using a technology called long-term evolution, or LTE, with more than 500 markets. Its controlling owner, Verizon Communications Inc. (VZ), is betting big on the wireless market, announcing plans Sept. 2 to buy out minority partner Vodafone Group Plc (VOD) for $130 billion.

AT&T has LTE in about 400 cities and towns, and Sprint has 151 markets. T-Mobile has the smallest LTE network, with service in just 116 markets.

More LTE

T-Mobile expects to expand its LTE coverage to 200 million people by the end of the year, including 90 percent of the biggest 25 markets, Chief Executive Officer John Legere said last month. The company merged with MetroPCS Communications Inc. in May, gaining airwave licenses to provide more capacity for wireless Internet services.

A cheaper iPhone, low-budget service plans and T-Mobile’s rapid LTE expansion should give the carrier some momentum during the holiday buying season, Entner said.

“They have the pieces in place, and they finally have the right network,” Entner said. “Doing the right thing really helps.”

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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