The iPhone Upgrade Plan is a Game-Changer

on September 10, 2015
Reading Time: 3 minutes

Apple announced a lot of new products at its big event on Wednesday – new iPhones, new iPads, a new Apple TV, and new Apple Watches and bands. But in some ways, the most underestimated announcement Apple made is going to be the introduction of the iPhone Upgrade Program.

Apple’s own device installment plan

In case you missed it, the iPhone Upgrade Program is Apple’s own implementation of installment billing for phones. If you’ve been reading Tech.pinions for a while, you’ll know I’ve written about these installment plans a few times over the past eighteen months. In this piece, I wrote the installment billing plans carriers were beginning to introduce could end up coming back to bite them. The reason? Customers no longer needed the carriers to subsidize phones and were, in fact, being trained to pay for their own devices in installments. Apple, Samsung, and potentially other device vendors might eventually introduce their own similar plans and that could be bad for carriers.

Fast forward to this week and, sure enough, Apple has finally done what I first said it should do a year and a half ago. So why is this a big deal? Well, the reasons are fairly simple: it allows Apple to take over the primary relationship with the customer, relegating the carrier to a secondary role in relation to their device purchase. Yes, you’ll absolutely still have a direct relationship with the carrier, but it will now be exclusively around the service plan and you’ll no longer be dependent on the carrier for upgrading your device. You’ll now be able to put your carrier on autopilot while you have a much more active relationship with Apple, upgrading annually on a set schedule.

More predictable iPhone sales, fewer churn opportunities

For Apple, this is a great arrangement because iPhone upgrades become much more predictable and it gains much greater visibility over future iPhone sales as a result. This should also help to stabilize Apple’s revenues from quarter to quarter, depending on how it ends up accounting for these leases. But more importantly, Apple now avoids the situation where an iPhone customer looking to upgrade wanders into a carrier store to check out new iPhones and winds up walking out with a new Samsung instead. Apple basically protects itself against the threat of competitive switching with these users, who will never even go into a carrier store in the first place.

Carriers risk higher churn

From a carrier perspective, things get worse rather than better. Yes, they forgo the expense and risk of financing the user’s device. But they also lose that primary relationship. With two year contracts going out of style and customers now no longer locked into device payment plans, the risk of churn goes up significantly, since customers on the iPhone Upgrade Plan can take their unlocked devices to another carrier whenever they want to. Since carriers still discount service if you bring your own phone, these customers will get the same deal on their service plan as if they were getting their device through the carrier, but without the lock-in.

A better deal than it might seem

To be sure, Apple’s pricing for this service is a little higher than most of the installment plans and leasing options out there today, at $32 per month for an annual upgrade, something Sprint’s CEO was keen to point out on Wednesday. But it includes AppleCare+, something which would cost a few extra dollars a month on a standard carrier plan and therefore the difference isn’t that great. In fact, customers on the iPhone Upgrade Plan will pay $768 over two years and get new iPhones both years, while paying off a new iPhone on a 24-month plan would cost $650 over the same period, but you’d have an older iPhone for half that time.

Bigger iPhone sales in countries without subsidies

The other interesting thing about the iPhone Upgrade Plan is that, even though it’s starting out as a US offer, it will spread to other markets over time, including some where carriers don’t subsidize devices and where the iPhone therefore suffers from its premium pricing. In some of these markets, Apple’s leasing plan will give the iPhone a significant boost versus historical performance and market share. It’s too early to know how big a boost, especially since we don’t yet know the timing for new markets, but it seems likely this will factor into the big upgrade cycle Apple seems to be anticipating for the iPhone this coming year.

Even though the carriers have largely celebrated the end of subsidies and the move to installment and leasing plans, it’s quite possible the carriers have opened the door to a trend that may well come back to bite them. They’ve both weaned customers off subsidies and trained them to buy their devices outright in monthly installments and, in the process, they’ve played right into Apple’s hands. They might well rue the day they embraced the move away from subsidies.