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Apple and subsidies, two words too often combined for the tastes of some dollar-counters, are the focus of new reports from investment firms Jefferies and Piper Jaffray.
Analysts at Jefferies believe an Apple television, or iTV, could be among the big reveals at Apples Worldwide Developer Conference (WWDC), which starts June 11. A subsidy, which could help to bring down an expected price point around $1,250, could make good sense on economics alone, they wrote.
Piper Jaffray analysts, meanwhile, expect AT&T and Verizon to differ in their approaches to subsidizing iPhone 5 handsets to existing subscribers wanting to upgrade to the smartphone.
Apples pricing forces the carriers to pay higher subsidies than they do for competing products, which has the industry lately discussing a way to avoid them, or at least lower them. However, this hasnt always been the case, according to Jefferies.
The carriers actually used to talk favorably about the subsidy model, as it prevented the industry from heading down the slippery slope of lower monthly pricing, and lower churn by virtue of a two-year contract, Jefferies analysts wrote in a June 6 report. Only with the advent of the iPhone and the growth in the tithe Apple is able to command have the carriers begun to spin the subsidy as negative.
Jefferies analysts used Verizons FiOS service as a model for how various subsidy scenarios could play out for the iTVan assumed name for an assumed-but-all-but-confirmed product.
They assumed a typical FiOS promotion is a triple-play bundle for approximately $100 for six months. For a new FiOS subscriber, they estimate a subsidy payback period of nine months, based on an upfront investment of $700 to connect the home to the fiber network and a lowered monthly revenue during the promotion period. If Verizon were to offer a $500 subsidy to new subscribers, but no triple-play discounts, along with a $20 per month wireless video fee, the payment period jumps to 13 months.
In our view, the Jefferies analysts wrote, this modest increase in payback period would still be value accretive with higher customer stickiness and market share gains vis-Ã -vis competitors that may not offer iTV-like functionality.
The payback period for an iPhone, they add, is about eight months, while an incremental line, on a family plan, brings that to 21 months; though the real benefit of an iTV is its material reduction in churn.
Apple is expected to offer a new iPhone this fall, and the timing of the device will force the carriers to tweak their subsidy strategies.
The bottom line is, we expect both AT&T and Verizons upgrade threshold to be 20 months for the iPhone 5 release [in October], with some potential AT&T exceptions for highly valued customers to get an upgrade after 18 months, states the June 5 Piper Jaffray report.
In the past, the report goes on to say, AT&Ts thresholds were 11 months for the iPhone 3GS, 12 months for the iPhone 4 and 18 months for the iPhone 4S, while Verizonwhich began selling its first iPhone, the iPhone 4S, in February 2011has been unchanged at 20 months.
Given the high level of interest in the iPhone 5, the analysts believe, carriers being less generous about how much time has to pass on a customers contract before he or she can upgrade and receive a subsidy, shouldnt affect sales very much.
The bottom line is AT&T should keep the same policy [as with the release of the iPhone 4S] because customers in all month ranges of their contract will purchase the phone at release, despite the premium for upgrading early, wrote the Piper analysts.
The only difference between AT&T and Verizons pricing, they expect, will be for those customers in the 13-16-month range; AT&T is expected to offer those customers a discounted price of $449, while Verizon is expect to make those mid-range customers pay the full retail price of $600.
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