|AAPL: iPhone Subsidy Cuts Tricky, Says BMO|
By Tiernan Ray
BMO Capital’s Keith Bachman this morning reiterates an Outperform rating on shares of Apple (AAPL) and a $695 price target, writing that his conversations with “a large European wireless carrier and a smaller North American carrier” recently suggest to him that lowering subsidies for the iPhone is something the telcos would like to do, but that’s it’s a difficult matter to achieve.
Writes Bachman, there may be some changes in subsidies around the fringe, but not likely a groundswell anytime soon, especially in front of what may be a version of the iPhone based on “long term evolution,” or LTE, cellular technology:
We continue to believe carriers would lower iPhone subsidies if they collectively felt that competing devices would drive the same economics (high ARPU, low churn) as iPhones. However, we don’t think this is a simple decision since carriers would fear much higher churn if they could not longer sell iPhones. In other words, we believe carriers would optimize economic outcomes by acting collectively in a region, in pushing back the amount of iPhone subsidy levels, to mitigate the risks of a spike in churn. Net, we don’t see risks to near-term changes in subsidy levels, but we do think 1) this is the number one risk to the Apple story, and 2) it will change at some point in the future, for the reasons mentioned above. However, we believe carriers would prefer to move subscribers to LTE networks to free spectrum, and thus promote devices through subsidies, including the new LTE iPhone.
Bachman writes that in Spain, for example, carriers are reluctant to lower subsidy levels on existing subscribers, because retention is important.
In North America, the phone company he talked to is promoting more phones based on Google’s (GOOG) “Android” operating system, hoping to create more of a “level playing field” in devices before considering any subsidy cut.
However, “the carrier noted that if other large North American carriers decide to reduce smartphone subsidies, then other carriers would potentially follow, similar to Spain.”
Apple shares today are up $10.77, or 2%, at $540.89.
Copyright 2011 Dow Jones & Company,