Will iPhone Sales Decline If Subsidies Are Abandoned?

Smartphone subsidies are becoming a thing of the past now that Sprint Corp (NYSE: S) has announced that it will stop offering two-year contracts.

The shift comes after T-Mobile US Inc (NYSE: TMUS) successfully marketed its own contract-free service, but competition is not the only source of the change. When a carrier subsidizes the cost of a phone, it essentially buys the phone from the manufacturer and sells it to consumers at a cheaper rate. This helped smartphones (particularly iPhones) gain traction when they were a new concept, but the industry hopes that subsidies are no longer necessary.

"The advent of Sprint's no-contract, phone-leasing era will likely cause some friction with consumers at first, as they've become accustomed to a contract and phone-purchase business model and consumers are resistant to change," InvestorPlace feature writer James Brumley told Benzinga. "With Verizon, T-Mobile and now Sprint moving to a monthly phone-lease model though, consumers will make the mental adjustment pretty quickly, recognizing they're not paying for anything now that they weren't -- somehow -- paying for before."

Excluding phones and service plans that are "clearly overpriced," Brumley does not expect the contract-free shift to be too disruptive.

Hiding The 'Real Cost'

Rob Enderle, principal analyst at Enderle Group, has previously shared his concerns about the end of subsidies. He thinks the new plans will have an impact on Apple Inc. (NASDAQ: AAPL), along with others in the industry.

"Part of what makes the iPhone so successful is that folks don't see the real cost," Enderle told Benzinga. "It is hidden under subsidies. As these subsidies are eliminated, it should force folks to consider the cost of the phone. They will either increasingly choose a less expensive offering or keep the iPhone they have longer to reduce that cost."

Enderle said that either option will "have an adverse impact on Apple revenues and profits."

"When people see the cost of a product, a premium offering typically occupies the top 10 to 20 percent," Enderle added. "Currently this is more like 60 percent, suggesting a rather massive buying shift will eventually result as the market aligns with more normal behavior."

iPhone Sales Assistant

Brumley thinks that Sprint's new model will help push the iPhone.

"Although it offers leases on other phones, including the Samsung Galaxy, the iPhone is the only device (so far) that's part of its 'Forever' monthly fee model," he explained. "This tacitly suggests Sprint knows the iPhone is the only phone on its menu that can draw enough buyers to merit the 'Forever' offer in the first place."

AT&T Inc. (NYSE: T) has a similar service plan.

"[It] is a way for consumers to avoid the sticker shock of outright buying a $649 iPhone every couple of years," Brumley continued. "In the end, this may actually boost sales of higher-end phones like the iPhone, as consumers come to grips with the fact that leasing is the new norm. As always, consumers may grumble initially, but they won't give up their beloved devices."

Disclosure: At the time of this writing, Louis Bedigian had no position in the equities mentioned in this report.