New IPhone Tests a Wireless Industry Scarred by Price Wars

(Bloomberg) -- A new iPhone means another opportunity for America’s wireless companies to engage in a knock-down, drag-out price war -- if the carriers still have the stomach for it.

Apple Inc. is expected to drop the latest version of its best-selling device as soon as next month, a year after its last upgrade spurred freebies from the four biggest wireless carriers. T-Mobile US Inc. was first to let new or existing customers trade in an iPhone 6 for an iPhone 7, and Sprint Corp., Verizon Communications Inc. and AT&T Inc. quickly followed with their own matching deals.

Those giveaways came at a price -- about $200 per subscriber in the final two quarters of 2016, according to Jefferies Group LLC. And the higher price expected for the new iPhone could swell the out-of-pocket expense further if carriers do similar promotions. The wireless companies would rather adopt a more conservative strategy this time around, but if one of them caves and offers an aggressive promotion, the rest are likely to follow suit.

It “is obviously not a healthy situation,” said Michael McCormack, an analyst at Jefferies. Larger carriers like Verizon and AT&T have more lower-end phones on their networks, he said. “Those are the subs that are most likely to be draw into a lower price point or some sort of promotional activity.”

With T-Mobile and Sprint pushing iPhone deals and unlimited-data plans last year, both Verizon and AT&T took big hits in the third quarter, losing 36,000 and 268,000 phone subscribers respectively. Even T-Mobile, which came out on top with a gain of 851,000 net adds in the quarter, says it may steer clear of the strategy this year.

“If you have a promo which is copied by everybody else, it’s somewhat less effective,” Nils Paellmann, T-Mobile’s vice president of investor relations, said Aug. 9.

In recent months, aggressive promotions failed to dislodge customers from their current carriers. Last quarter, the four biggest wireless companies reported declines in churn rates, or the percentage of customers who cancel their service each month, compared with the first three months of the year.

Intense promotions have become a staple in the highly competitive industry and carriers may have no choice but to give customers what they want, said Chetan Sharma, an independent wireless analyst. New promotions are going to be “focused on keeping the existing customers as much as they are designed to churn them from their competitors,” he said in an email.

The market is flooded with devices, making it difficult to find new users. With 395.9 million total active gadgets, there are more than 1.2 per American, according to the industry trade group CTIA. With carriers offering similar network quality in large population centers and unlimited data, the incentive to switch is forcing companies to go bigger and bigger with their freebies.

Just this year, AT&T has offered free HBO as part of its Unlimited Plus wireless plan, and Verizon put up a selection of free smartphones for people who switched from another carrier to its unlimited plan and traded in their current device. Sprint granted six free months of Tidal, rapper Jay-Z’s music service in which the company agreed to acquire a 33 percent stake in January. T-Mobile, meanwhile, gave away a free year of TV-streaming service Hulu for select customers and a year of MLB.TV Premium for current users.

Sprint took direct aim at Verizon customers in June when it offered a year of unlimited voice and data to its rival’s customers who brought in their own phones. Underscoring how such promotions may be losing their punch, Sprint Chief Executive Officer Marcelo Claure said Aug. 1 on a conference call with investors that the offer only accounted for 1 percent of new customers.

Sprint, AT&T, Verizon and T-Mobile declined to comment on specific upcoming promotions for the new iPhone.

The only clear winner in all this is Apple, said Avi Greengart, a wireless analyst at GlobalData.

“If there’s a frenzy of promotions around their product that makes it easier for consumers to buy them,” he said, “Apple doesn’t care what carrier you’re using.”

To contact the reporter on this story: Reade Pickert in New York at epickert@bloomberg.net.

To contact the editors responsible for this story: Crayton Harrison at tharrison5@bloomberg.net, Jessica Brice