Apple Inc’s iPhone 7 Release Could Dampen Margins for Big Three Wireless Carriers: Analyst
The latest iPhone may have consumers flocking to Canada’s Big Three wireless carriers to upgrade their smartphones, but the providers’ margins could take a hit in the next quarter due to the anticipated increase in sales, according to one Bay Street analyst.
Higher demand for new hardware is expected to put incremental pressure on the costs of acquiring and retaining customers across the industry, Barclays Capital Inc. analyst Phillip Huang wrote in a note Monday.
Sticker shock for the new iPhones — prices range from about $400 to $800 on two-year plans, which is higher than what U.S. consumers will pay even when accounting for the weak Canadian dollar — doesn’t appear to be scaring away buyers. Pre-ordered stocks of iPhone 7 and iPhone 7 Plus were largely sold out across the country despite their expensive price point, resulting in steep discounts for older iPhones.
“We believe very limited pre-order supply was allocated to the Canadian carriers this year, partly due to the strong demand in the U.S.,” Hunag wrote.
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“Despite limited supply of the new iPhones, the carriers are capitalizing on the increased traffic to their stores with deeply discounted older iPhone models to ensure customers do not walk out empty-handed.”
The larger volume of upgrades is expected to dampen growth in earnings before interest, tax, depreciation and amortization (EBITDA), Huang wrote, as companies will have to spend more on hardware and absorb the discounts.
He believes older iPhone models will drive most sales next quarter, as it will be challenging for consumers to get their hands on the latest models that have made headlines for being waterproof and, more notoriously, for lacking a headphone jack.
Carriers are capitalizing on the increased traffic to their stores with deeply discounted older iPhone models to ensure customers do not walk out empty-handed
Discounts for older models vary by region and provider. The best deal appears to come from Telus, which is giving away the 64 GB iPhone 6S for free on a two-year contract.
On top of the iPhone spree, back-to-school pricing deals are expected to drive more consumers to update their hardware and subsequently place additional pressure on costs and EBITDA, Huang wrote. Major carriers threw in extra data along with new smartphone purchases to entice subscribers in the busy shopping season.
The tighter margins in the third quarter come after second quarter results beat analysts’ expectations by a long shot when the Big Three added about 195,000 subscribers.
Wireless continues to steal the spotlight from traditional telephone, television and Internet business lines as the highest growth segment as people cut their cords, although the shift to faster Internet connections has also been a bright spot for telecoms. Heavy price competition for wireline spread from Ontario and Quebec to Western Canada over the summer, with Shaw and Telus both launching stellar deals for their ultra-fast Internet packages for new customers willing to sign contracts.