September has become Apple’s month. For much of the last decade, they have used September to launch impressive new products as well as updates to existing devices and services. 2015 was no exception with the recent announcement of a new version of iOS, updated iPhones and a new iPad Pro.
Somewhat lost in that announcement, however, is likely the largest long-term driver of value to Apple (and commensurate loss of long-term value to mobile carriers) – Apple-sponsored leasing. With this move Apple takes yet another value block from the carriers and further solidifies customers in the Apple ecosystem. It is a brilliant move for Apple that has the carriers frightened.
The US mobile market has been shifting on several fronts for the past two years, most notably in how customers acquire devices. For the first decade of the 21st century, and even up until early 2013, the standard model was for a carrier to offer a new device to a customer at a steep discount in exchange for a contract, usually two years in length. This “subsidized” model helped lock customers into a particular carrier, creating a strong barrier to switching, and shielded customers from the true cost of the ever-more-powerful mobile devices being carried in their pockets.
When Apple launched the first iPhone in mid-2007, the foundation of the subsidy model began to crack, but it would be half a decade before it essentially crumbled. As the Apple-Android duopoly grew, driving faster, bigger and more functional devices into the market, carriers began incurring subsidy costs in excess of $400 and sometimes higher. Over time, the secondary market began to realize the value of these devices and carriers struggled with finding pricing models that made profitable sense with a two-year upgrade cycle. Additionally, carriers took a look at successful “leasing” models in other markets (Japan, the US car sales) and saw an opportunity (but missed the risk).
Leasing devices began in earnest at almost every carrier in 2013 and is now the dominant form of device acquisition in the market. Verizon, for example, will not be offering subsidized devices going forward (and said almost 60% of its third quarter smartphone sales would be on installment/leasing plans), and most carriers will follow that lead by the end of this year.
For the carrier, leasing fully separated device and service, always seemed like a noble and economically solid decision. Without boring you with the details, the leasing model is materially better for carriers from an accounting and economic perspective. What the carriers never realized, or intentionally blinded themselves to, was that leasing removed one more value element connecting them with their customers. Every carrier fears being the “dumb pipe” and we are stepping closer to that daily.
A brilliant element of the Apple strategy (and Android to some degree, but less so without full end-to-end control of hardware and software) is the continued accretion of value to Apple, and disaggregation of the carriers from the relationship. Think about it. Apple started, really, with your music. The carriers all tried their own music services, but none could compete with iTunes (or Spotify and Pandora). Apple offers its own insurance product – AppleCare – that sucks people away from one of the most profitable offerings the carriers have.
Do most Apple users take advantage of iCloud? Yes, why not? 5GB free storage, location services for your device and a host of other services make it a handy service. Oh, and they sell you additional storage (because who really has only one Apple device)? Have you used ApplePay? If not, you will, or the Google equivalent (I’m sure you remember the carrier payment service – ISIS – not kidding on the name). Another value block for Apple.
With this September’s announcement, Apple has taken yet another huge step in locking customers into the Apple Universe – a world where the carrier is irrelevant. I can now lease an “unlocked” (industry parlance for a phone that works on everyone’s network) device in the super-customer-friendly Apple store (or online) for $32 a month (including AppleCare). Apple promises me a new iPhone every year. Oh, and that iPhone can be switched to any carrier I want, with almost no switching cost other than time and maybe an activation fee.
So now the carriers have been disaggregated from a huge value block and locked further into Apple’s universe. Not surprisingly, Samsung announced their own leasing plan soon after Apple announced theirs. What then, ties me to a carrier? Now only three material things – network quality, price and customer service.
Every carrier, not surprisingly, is desperately searching for other ways to inspire your loyalty. Some, like Sprint, will use price on the iPhone. (Sprint’s iPhone leasing plan is currently on sale for $15/month.) Others like AT&T and Verizon will continue to tout network quality and speed, and add services like storage (AT&T locker and Verizon Cloud) that put a customer’s data at the carrier level, not the device manufacturer level.
If the venture capital and IPO market are any guides, storage may be the near-term best option for carriers. Third-party storage companies like Box and Dropbox command billion dollar plus valuations. Apple already offers iCloud (and Samsung a similar product). But for households with mixed iOS and Android worlds, or who just don’t like having all their proverbial eggs in one basket, carrier storage can be the sticky app for the next few years.
As the IoT market grows, customers will have even more non-traditional mobile data to keep. We liken it to consumer banking – once you have auto bill pay from your checking account, changing banks is really hard. Not worth the hassle. If carriers can tap into that market, it may offset the loss of value in the handset space.