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U.S. wireless carriers including T-Mobile and Sprint have reported record iPhone pre-order sales in the run up to today’s iPhone 7 launch. But while those figures will undoubtedly be good for Apple, industry analysts are split on just how much they’ll help the carriers themselves. According to analysts, the heart of the issue is the way carriers have been promoting the iPhone 7 – namely, the way they’ve essentially returned to a two-year subsidy model with their offers of a free iPhone when users agree to a 24-month installment contract. In a Thursday research note, BTIG’s Walter Piecyk said though the tie-down medium is an equipment installment plan rather than a service contract, it could still have the same beneficial effect on churn. “All wireless operators benefit by getting customers carrying old phones back on a two year commitment,” Piecyk wrote. “Anyone with an older phone is effectively off contract and more likely to churn. This promotion provides a financial incentive to bring those customers back on an effective contract, which should benefit churn and ultimately cash flow.” However, Piecyk noted the structure of these promotions will also create an “incremental headwind” and add complexity to the carrier’s EBITDA reporting. Craig Moffett of MoffettNathanson picked up on this thought in his own Friday note. During the 2014 iPhone cycle, Moffett said carriers enjoyed the benefit of shifting away from subsidies to equipment installment plan (EIP) accounting – and EBITDA still fell by 3.4 percent. Because EIPs are no longer new and because of the free device promotions, the iPhone 7 cycle won’t enjoy the same perks, he said. “In the old days, the customer notionally paid for their $400 subsidy by paying about $20 more for their monthly service. When the industry moved away from subsidies to EIP, that $20 went away, replaced by explicit equipment installment payments,” Moffett wrote. “Well, now the carriers are back to offering subsidies…but that $20 per month ‘pay off’ is gone forever.” According to Moffett, the return to giving away free phones – free iPhones in particular – could “wreak havoc” on reported EBITDA and margins. The promotions will also likely impact customer lifetime value, he said. While Moffett said the impacts of a return to the subsidy model could be monumental if it indicates a long-term shift, Piecyk pointed out the promotion is likely to be short lived. As Piecyk pointed out, T-Mobile’s 2015 iPhone promotion ended in October.
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