20 May 2016

The Motley Fool: “Apple’s problems could get much worse”

In 2012, U.S smartphone users upgraded their phones every 22 months on average. The two-year contract, where smartphones were subsidized and sold at a discounted price by the major wireless networks, created an incentive for consumers to buy a new phone every two years. Also driving sales was the fact that smartphones were getting substantially better each year. Gains in performance and quality were meaningful, and two years was enough time to make most phones largely obsolete.

Today, the two-year contract is dead, and smartphones no longer improve dramatically each year. The upgrade cycle is getting longer while developed markets like the U.S. approach saturation.

Longer upgrade cycles will also put pressure on Apple. In the United States, the smartphone upgrade cycle has reached 29 months, according to Citigroup. This shift was likely a major contributor to Apple’s first iPhone sales decline, and there’s no reason why the upgrade cycle can’t continue to get longer. Apple’s phones in particular are high-quality and long-lasting, and without major improvements each year driving users to upgrade, the move to a three-year upgrade cycle isn’t out of the question.

Timothy Green

Wait, but I thought without carrier subsidies the upgrade cycle would become shorter, not longer?! Could all those ‘fanboy’-analysts (Apple itself included) have been wrong all along? – see the article below from 8 months ago. Lesson of the day: except for hard-core fans, people don’t simply throw money out the window whenever a new gadget hits the market.

Second, these installments have been accompanied by the introduction of a set of ‘rapid upgrade’ plans that effectively put the user on a permanent rolling contract in exchange for a new phone every year. You sign up to pay installments for some period longer than 12 months (it varies - 18, 20 or 24 months are in the market), but after 12 months you are given the option to get another new phone for ‘free’ if you extend the contract accordingly. To the consumer, the offer is simply that you continue making the same payments (roughly a dollar a day) but get a new phone entirely for ‘free’, which is pretty appealing. But that means you're effectively (if not legally) tied to your mobile network operator for the new, extended period - and then in a year, they do it again, and extend the payment again. So, your service plan starts at 24 months, runs out and then continues without a fixed term, but your installment plan keeps rolling on another 12 or 18 months into the future indefinitely, as long as you keep accepting new phones.

If you do the maths (and it’s complicated and depends on your assumptions) these plans generally work out at roughly the same total cost of ownership as buying a new phone yourself for cash every year and selling the year-old one into the secondary market. There are a number of companies trying to handle that for you, but this makes it effortless. And for the operators, you’re much less likely to churn off to another network.

Benedict Evans

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