The iPhone Post

There has been a great deal of noise around Apple and the iPhone. If you believe many of the sell-side analysts, the iPhone has peaked. Many of you have written in asking me my thoughts on what is going on. I’ll address them in this post with data.

Shift in Mix of Sales

What many are missing, at least in their public commentary, is the new dynamics of the mix of old and new iPhones sold. What we see happening in December is very strong continued momentum of the iPhone 6 and 6 Plus in all major markets. Last year’s iPhones held their competitive strength in the marketplace and, at discounted prices, enticed not only more of the iPhone user base to upgrade but a high percentages of Android switchers as well.

Looking at supply chain cuts, for whatever quarter they are related to, makes sense in this light as Apple would have cut back build orders of the new line of iPhones if the mix of older phones was higher than they anticipated. This would have also been very hard for most the financial analysts to estimate. Most of them do no primary research and base their models on static templates, not dynamic ones. They would be using a historical model for the mix of new vs. old sales and, even if they erred conservative sensing the iPhone 6 and 6 Plus would have a higher mix, I’m certain even their most conventional models were off base.

While we look at many markets to gather this data, one market I constantly look at is China. With sources there, I can track active devices thanks to popular developer APIs which identify smartphone model numbers. What I’m showing you related to China is a similar picture in many of the markets we track which also happen to be the all Apple’s major markets among others. Notice the strength of the 6 and 6 Plus relative to the 5s in the second half of 2014 and the first half of 2015. The 6 and 6 Plus are doing far better than any n-1 SKU Apple has kept in market according to our data.

Thanks to the extremely strong lineup of 6, 6 Plus, 6s, and 6s Plus, Apple is poised to have its biggest quarter in China, likely shipping 24-25m iPhones to the mainland and surpassing the US market in sales for the first time in a Q4 timeframe. Last year, China outsold the US during the first quarter and, this time around, it looks like China will be their largest market for iPhones sales in Q4 and Q1. The strength of this lineup also caused China Mobile, the nation’s largest carrier, to have its largest net 4G user add in the month of December. Adding 24.59m new 4G customers in a single month and 64 million for the quarter are both new highs.

Growth Dependencies

There are three areas which will impact Apple’s growth of iPhones. The first is the massive base still needing to upgrade.

Here are two charts from our quarterly survey data, looking at the mix of devices owned (at the time of the survey) of both China and the US.

Again, the data tells the story of the strength of the iPhone 6 and 6 Plus, but also a large percentage of the base slow to upgrade. With Apple announcing only 31% of the iPhone base had upgraded to the 6 line of iPhones as of the end of the third quarter, our data tells us 50% of iPhone owners are still on the 5s or below and 47% of iPhone owners in China are on the 5s or older. With the holiday quarter generating healthy sales, it is likely Apple will report high 30s to low 40s percent of the total iPhone base has upgraded even though more than half in the US and China already have. The rest of the markets may just move a little slower and that is a key point to watch as it relates to the iPhone growth narrative.

The next area is Android switching. It bears reiterating that all developed markets and developed parts of emerging markets are replacement markets–China included. Meaning, consumers are on their second, third, fourth, etc., smartphone. Part of Apple’s growth story for iPhones is new users and what we look for are things in the Apple ecosystem that continue to attract first-time iPhone owners switching from another platform. China is a part of this growth story of switching and I stress the iPhones ceiling there is nowhere near reached. Even if Apple took a measly 5% more share from high-end Android sales and 5% from mid-tier priced Android phones, they could add 20m units in new customers. From primary research we ran in early December, 26% of respondents said they had switched to the iPhone from another platform. Interestingly, 7% said they became iPhone owners from a non-smart phone. Keep that in mind for developed markets where 20%, and sometimes more, consumers are still on feature phones.

Lastly, a key factor for Apple’s iPhone growth is replacement cycles. A major question for 2016 I hope to answer is whether replacement cycles are likely to shorten or lengthen. One of the things Apple does is make extremely reliable hardware. The lifespan of an iPhone is longer than any other smartphone by any other manufacturer. This is one reason the resale value is so high but it also allows consumers to hold onto their iPhones longer. As I pointed out yesterday in my post about the billionth iPhone, the fact the iPhone appeals to every spectrum of the adoption curve is unique. But, late adopters and the late market majority don’t tend to buy new things very frequently. My father-in-law is the blueprint of a technological laggard. He still owns an iPhone 5c and is entirely content with no immediate plans to upgrade. While the long-lasting quality of iPhones is one of the major reasons consumers on the later stages of the adoption curve buy iPhones, it will also impact how frequently they upgrade.

Just focusing on the early adopter and early majority, I have some data on their mindset for upgrading.

– 49% of iPhone owners said they were on a carrier plan like AT&T Next or Verizon Edge which allows them to upgrade annually or every other year
– 41% plan to upgrade every two years
– 21% plan to pay their phone off over the plan’s time frame and use it longer than two years
– 20% plan to upgrade yearly
– 18% pay full price up front for their smartphone

Building in relatively predictable upgrade cycles will be helpful for Apple. We anticipate Apple’s own iPhone upgrade program to be popular in markets where Apple has a strong retail presence and in the US in particular. By early December, our surveys were revealing 10% of iPhone customers had already moved to Apple’s own upgrade plan. I anticipate this to grow over 2016 and 2017. However, I do have a sense the late majority and tech laggard parts of the adoption curve will hold onto their devices for longer than two years. As of now, we are not fully clear on how many people that translates to. This will be important to get a sense of in 2016 as we see how much of the 5s and later base upgrades. Hopefully, those metrics will help us understand the life cycle of iPhones with those consumer profiles.

Changing the Narrative

In this post, I articulated how the narrative around the iPhone needs to change. While Apple will still generate large portions of its revenue from the iPhone, I encourage folks to focus more on total revenue growth, not just iPhone shipments. I expect other products in Apple’s portfolio to continue to grow and add to their bottom line. Even if Apple has a YoY decline in iPhone sales in a quarter or two this year, I still expect them to have YoY revenue growth.

Lastly, consider what Apple is doing overall for computing. If we count smartphones, tablets, PCs, and smartwatches as personal computers, you can argue Apple is doing more to advance personal computing than anyone. Apple likely shipped almost as many 64-bit processors as Intel did to PCs (consumer and enterprise, excluding servers) in 2015. And, while Samsung still sells more smartphones each year than Apple, the vast majority of smartphones they sell are under $300. Apple ships more hardware with 64-bit desktop class performance than any other personal computer maker. I stress this point. Who is doing more to advance personal computing for the masses?