The market for smartphones is hugely reliant on mobile carrier subsidies, and a good part of this market is upgrades for existing customers. Thus, when AT&T (T) decides to double its upgrade free from $18 to $36, much like Sprint (S) did on September 9, 2011, the operator is giving a first step towards raising the cost for the customer to upgrade, and as such, lowering the incentive and probability that the customer will do so.
Fewer upgrades, in turn, will quickly turn into less smartphone sales. After all, almost the entire market already carries a mobile phone, so except for new entrants and people switching operators, the overwhelming majority must be getting their phones through upgrades.
This is a logical step for the mobile phone operators - if the customer is simply upgrading his phone, the operator gains nothing, and picks up an added cost as mostly every smartphone is heavily subsidized, so the mobile operator has to eat a loss on almost every upgrade. On the other hand, these fees cannot be so high as to incentivize the customer to switch carriers to get the new smartphone, so there's a limit on how high they can go.
Still, the fact that mobile carriers are waking up to the cost of providing deeply subsidized smartphones to their customers, and trying to, however slightly, put limits and costs on the practice, has to be seen as potentially positive for the mobile operators, and potentially negative for the smartphone makers, including Apple (AAPL), Samsung, Nokia (NOK) and Motorola (MMI), among others.
Impact on Carriers
Taking into account Sprint 's latest quarter, Sprint sold 1.8 million iPhones, but of these only 40% were for new customers. I say "only", but the company actually bragged about there being so many. What this tells us is that 60% of the 1.8 million iPhones were sold to existing customers - that's a full 1.08 million iPhones. While it's hard to know how many of these were subject to the upgrade fee, it does set an upper limit at $18 x 1.08 million = $19.44 million, or just $0.0065 per share in added revenues. However, the largest impact in this scenario would not come from how much more additional revenue Sprint can bring in, but instead on how many existing customers Sprint can discourage from upgrading while still remaining with the company. With subsidization per iPhone running at around $400, even if just 10% of the customers chose not to upgrade, that would represent savings of 1.08 million x 10% x $400 = $43.2 million, or $0.014 per share … and remember, that's just with discouraging 10% of the upgrades.
AT&T would probably see an even greater impact. After all, AT&T sold 9.4 million smartphones (and 7.6 million iPhones), while recording just 2.5 million net new customers. Again, most smartphones were surely upgrades, and AT&T says as much when talking about the cost impact.
Fourth-quarter 2011 reported wireless operating expenses totaled $14.2 billion, up 20.9 percent versus the fourth quarter of 2010, due to record smartphone activations including the October 2011 iPhone 4S launch and customer upgrade levels. AT&T Mobility's operating income margin was 15.2 percent compared to 22.9 percent in the year-ago quarter, reflecting these expense factors and partially offset by further revenue growth from the company's base of high-value smartphone subscribers and cost-savings initiatives.
This points towards more than 73.4% of the smartphone sales being to existing customers, or 6.9 million phones. If all were subject to the upgrade fee, it could mean as much as $124.2 million in additional revenues or $0.021 per share. Again, if just 10% of the customers could be persuaded not to upgrade, that would make for 0.69 million phones, which at $400 a piece in subsidies would mean savings of $276 million … or $0.047 per share.
Impact on Smartphone Makers
The impact of this kind of measure is quite hard to estimate (it basically depends on the demand elasticity that customers will show, because of having to pay a higher price for their upgrades), however, it shouldn't be underestimated.
It's hard to say what the impact of this measure will be - surely, it will lead to fewer upgrades as any increase in price does, but quantitatively it's something that has to be monitored before its impact can be gauged.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.