Apple Inc. (NASDAQ:AAPL) began taking pre-orders for its LTE-equipped Apple Watch Series 3 on Sept. 15. Apple and carriers worked out an agreement that gave customers free LTE activation and waived the $10 monthly fee for three months. With the free trial ending, many customers are discovering those Apple Watch fees are up to 40% higher than $10.
Surging Apple Watch sales were a big part of the record fourth-quarter earnings that pushed AAPL stock to all-time highs. What happens if the reality of ongoing Apple Watch fees dampens enthusiasm for the company’s flagship smartwatch?
Monthly Apple Watch Fees are $10, But Extras Could Make That Almost $15
The Apple Watch Series 3 starts at $329, but the model that has people excited is the Series 3 with LTE, starting at $399. This long-awaited Apple smartwatch cuts the iPhone tether. Owners can make and receive calls without being connected to an iPhone. They can also stream Apple Music and use Siri.
LTE capability has been credited with driving Apple Watch sales, and inspiring an impressive number of customers to upgrade from earlier models. These existing owners have been paying $399+ to replace an Apple Watch that’s a few years old at most, all for cellular connectivity. The LTE option is also a key feature that rival Fitbit Inc’s (NYSE:FIT) Ionic smartwatch can’t touch. As a result, analysts are calling for Apple Watch sales to ramp up, contributing to AAPL stock growth.
Of course, there’s a cost associated with LTE service: $10 month, or so buyers were told. Apple worked with major U.S. cellular carriers to waive LTE activation costs and the first three monthly Apple Watch fees, so the cost was largely invisible.
Now the bills are due, and it turns out that Apple Watch fees are higher than the company and carriers led buyers to believe.
MacWorld first posted about the costs — focusing on the Apple Watch fees for device activation. Then, MacRumors conducted a detailed investigation for various carriers, finding that with surcharges, taxes, administrative charges, services charges and other costs that are tacked onto a bill, the actual Apple Watch fees being charged range from $12 to over $14 per month. In some states, costs may be even higher.
And as MacWorld discovered, users who decide the best option may be to deactivate their LTE for months where they won’t be making use of it, then reactivate it later, will face sticker shock. Most carriers are charging $25 or $30 to reactivate an Apple Watch on their network.
So that means the Apple Watch Series 3 LTE fee goes from $10/month, or $120 year, to as much as $14/month and $168/year, with a hefty reactivation fee if users tire of paying that monthly charge, then choose to come back.
Will High Fees Hurt Apple Watch Sales?
Apple CEO Tim Cook pointed out in the company’s Q4 earnings call that Apple Watch sales had grown 50% for three consecutive quarters. He called the Series 3’s LTE connectivity a “game changer” and noted that in fiscal 2017 Apple’s wearable business alone became the size of a Fortune 400 company.
In fact, in that record Q4, the Other division — which includes the Apple Watch — led all divisions in growth, hitting 36% year-over-year growth in unit sales. Early analyst reports had 80% to 90% of Apple Watch Series 3 sales being the LTE version.
Some buyers were already likely to cancel their LTE service after the free trial ended and the Apple Watch fees kicked in. With the higher than expected monthly charges, that number is probably going to be higher. And disgruntled owners could take to social media to complain about hidden costs. That’s likely to cost Apple some sales, and non-cellular competitors could take advantage of it in their marketing.
At this point, it looks unlikely that higher-than-expected LTE fees will derail Apple Watch sales and hit AAPL stock on the next earnings report.
Apple’s smartwatch is capable enough to remain the top-seller in its class, even without the option of cellular connectivity. The worst -case scenario is likely to be a switch in the sales mix. Non-LTE versions might become more popular, costing AAPL $70 per unit in revenue, but not spooking investors by seriously impacting unit sales.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
