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Wireless Carriers Bring Back Subsidies for iPhone 7

In recent times, major U.S. carriers have been gradually shifting away from the annual contract model in an attempt to simplify things for customers. However, with the launch of Apple Inc.’s AAPL iPhone 7 and iPhone 7 Plus, it seems that wireless carriers are striving to bring back some of the features of the subsidy that used to be the standard norm few years ago.

The Trend

In order to attract customers, smaller wireless players like T-Mobile US Inc. TMUS and Sprint Corp. S unveiled attractive device leasing plans with monthly payments that allows the user to own the device as well as gives the option to trade in the device to upgrade to a newer phone. Other large wireless players such as Verizon Communications Inc. VZ and AT&T Inc. T too launched their device leasing plans as a response to increasing competitive threat. However, the plan incentivized customers to keep the phones longer than a year due to ownership of the same, customers rarely upgraded to a newer model citing little technological benefits. Further, the subscribers rarely switched to other carriers despite lucrative plans. This was evident as the customer churn rate in the second quarter of 2016 touched an all time low. Although low customer churn is positive news for the wireless carriers but it also means lower possibilities to add customers in the future.

The Bottom Line

In days where subsidy was a norm, the wireless carriers used to charge an upfront amount from the customer and recovered the rest of the cost through monthly billing. The latest iPhone plans have more or less the same characteristics except for the fact that the carriers are now willing to trade an IPhone 6 or 6s or Galaxy S7 and not charge the customer an upfront fee. But will it bode well with the customers? How much benefit can the wireless carriers get in this lower churn – subscriber addition trade off? We leave it for time to answer.

All of the top four Wireless carriers in the country currently have a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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