The iPhone Upgrade Plan is a Game-Changer

Jan Dawson / September 10th, 2015

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.

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw, a technology research and consulting firm focused on the confluence of consumer devices, software, services and connectivity. During his thirteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.
  • Comment_Cop

    Nice article. Smart move by Apple.

  • Wonder if Citizens technically is purchasing the phone outright, then turning around and setting up the loan to the consumer. Seems plausible, in which case it may be rev rec neutral as Apple could still recognize the full sale upfront. Maybe this is why they require bundling AppleCare+, so that there is money to cover Citizens’ cut.

    re: pricing, interestingly if you upgrade every 12 months, Apple’s pricing is actually *lower* than AT&T’s Next 12 plan- because Next 12 has 20 installments vs. Apple’s 24.
    (e.g. 16GB 6s is $32.45 AT&T vs. $32.41 Apple, all the way to 128GB 6s Plus is $47.45 AT&T vs. $44.91 Apple). So slightly cheaper and includes AppleCare+. I think TMO and VZW do 24 installments so in that case Apple should be more expensive.

    • Yes, I’m curious to see the financial analysts getting the details on how this will actually work from an accounting perspective – it’s certainly a strong possibility that it will work as you say. It’s certainly not the most important aspect of this from Apple’s perspective.

  • Rob bennet

    Jan, nice work on predicting this.

    >> 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.

    It’s a bit different. If you use Apple’s upgrade plan , after 2 years , you’ll own only half of a new phone, while using a regular plan, you’ll own a full phone, but a year older – and you’ve paid less.

    But the interesting question is – since it’s not easy to do that math, and anyway your monthly price looks the same – so it feels as though you’re losing an immediate clear benefit(shiny new iPhone) for something complicated, vague in the future(and many of your friends will believe the yearly plan is better financially) people will prefer to go the 1-year replacement route. Further more , once it becomes socially common to do + some of the slow updates stuff – it will all psychologically tip the balance for 1 year replacement cycle.

    • kgelner

      You are not including AppleCare in those calculations, which has real value.

  • AlarikSkarstrom

    Thanks for the article. One point puzzles me. What is the value, extra value, to Apple Care for the year if you have a new phone, which comes with a one-year guarantee? If the phone is replaced each year it would always be under the new-phone warranty? What am I missing?

    • melci

      New iPhone warranty doesn’t cover accidental damage like cracked screens – 2 per year with Applecare+.

      • AlarikSkarstrom

        Ah. Thanks.

      • Hey Melci, agree, but it seems even with Applecare+ you still need to pay $99 per incident for cracked screen, vs. $129 with regular Applecare?

        So seems not really worth it unless you expect many accidents, or to keep the phone the 2nd year. If you have other info please share 🙂

        • sbronstein

          fwiw, it’s not just screen replacement – if your iPhone gets wet and is completely dead, you get a new one for $99 w Applecare+ vs paying full price for a replacement.

        • I just replaced an ipad air 2 screen and it’s $49 each for the two repairs. A regular repair would have been $149. More importantly, they cover bigger damage like…. water damage that would require replacing the whole phone.

      • ann onymous

        It would be good to know what the non-AppleCare screen replacement cost will be to be able to make that value decision, but we probably won’t know that until they’ve been in the field a while.
        Does anyone know the difference on the iPhone 6 between AppleCare+ and non?

      • Stevechang64

        Let’s not forget a $100 deductible per incident

    • kgelner

      In practice people with Applecare are more likely to get a device replaced with an entirely new one if something is acting odd with it.

  • KevinD

    As I’ve said elsewhere, this is the one more big thing for Apple at this event. Since they always have you on the hook for 24 months when you get your new phone, they know they have money coming in. And since it doesn’t “cost” you anything extra to get that new phone after 12 months, you willingly extend your hook for another 24 months. They get rolling customers that gladly sign up for another 24 months. You are always on the hook for between 12 and 24 months. Never less. I think it’s genius. Must have been someone at a bar that thought this up.
    The other solution this provides is a steady stream of gently used phones to resell in a lower market. Indian customers will be getting those gently used 1 year old phones and relish in the boost of performance they get over buying a new 4 year old phone design.

    It solves multiple problems at once. Keeps the upscale customers upgrading while providing a supply of 1 year old phones to resell. If I ever see that genius at a bar I’ll buy them a drink!

  • PeterBlood

    This plan will also screw companies like Gazelle with Apple making secondary profits on selling older Apple device gear instead.

  • Jules Hobbes

    It seems like yesterday that so called “experts” proclaimed the end of subsidies (which never where subsidies in the first place) to be the end of the iPhone. Alas, a lot of tech writing has this quality of insight.

  • davebarnes

    You commenters are looking at this too analytically.
    The average consumer will see:
    1. same price
    2. new phone every year + AppleCare
    3. don’t have to deal with those pushy idiots/jerks at the [insert carrier] store.
    Sign me up!

    Yes, I know the prices are NOT the same. But, the typical consumer does NOT do this. If they did, they would have always bought their phones upfront.

    • ann onymous

      #3 is probably going to be the biggest driver..!
      Once the carriers started pushing these installment plans rather than subsidized lock-in, they only left their customer service as the distinguishing factor as to why people should shop with them. Even when there was lock-in, I bought my phones through the Apple Store, though it seems that was a minority position.

    • pk_de_cville

      “…don’t have to deal with those pushy idiots/jerks at the [insert carrier] store.”

      Let’s remember the high art of pushing Samsung onto Apple customers first developed at Verizon. Sales Spiffs – Getting paid to trick customers into buying crapola.

      Since spiffing into crapola is a major contributor to lost iPhone sales, this lease program perhaps portends a huge increase in unit growth over the next 3 years. It depends on how well Apple can make the sale on these new plans.

      Anyway. They have a shot.

  • Jamilamadingdong

    None of the stories I’ve read about the iPhone Upgrade Program even mentions the fact that Apple makes a higher margin on iPhones it sells itself as opposed to those sold by retailers or carriers. This is another way that Apple will profit from this while everyone else loses.

    • capnbob

      True but marginal due to the fact that retailers make almost nothing on Apple hardware. Traditional retail margins don’t apply to Apple apparently. That’s why BB etc are so desperate to sell you plans and accessories because they make only a few $s on the device themselves. I doubt carriers are much different (which is why they are so keen to sell you something else).

  • ann onymous

    You don’t “get new iPhones both years” as you state Jan. Apple’s wording is that you have “the option to get a new iPhone after 12 months”. The footnote that goes along with that ends with “Full terms apply” but that link goes to a Apple Legal page which isn’t published yet, so in truth we don’t know what the catch is with the Apple Upgrade program. I’m sure it won’t be a free new model though while continuing to just pay the remainder of the 24 installments, so your assumption that at the end of 24 months on one plan you’ve used two latest-model phones for 12 months each and on the other you’ve used a year-old model for half the time is just wrong.
    You will have to pay off the balance if you want to upgrade after 12 months. You end up paying the same $978 for a 128Gb phone with $129 AppleCare+ but with Apple you pay it in 24 payments, with AT&T you’ll pay it in 20 slightly higher payments if you choose not to upgrade.

    Or you can just forego the 0% loan from AT&T or Citizens and buy the phone outright on day 1. That way you really know the cost of the computer in your pocket!

    • capnbob

      The typical plan is that you hand back your old phone after a year and get a new one. That’s how it pays off for Apple since the device is worth more than the initial price minus what you’ve paid in year one. We can’t guarantee it but that’s how most of these installment plans work. It will hurt the supply of used iPhones if this is true.

    • I think you’re making assumptions here which aren’t warranted. As the other commenter here notes, it’s standard on carrier leasing plans to allow you to upgrade on this basis to a new phone after 12 months. The difference between paying off the full 24 months and upgrading after 12 is that if you make all the payments the phone is yours, whereas after 12 months you give back the phone in exchange for a new one (and the lessor then gets to sell the phone on the secondary market).

      • ann onymous

        As I said, the full terms were not available. Now they are.
        Trading
        in the year-old phone for a new one and starting a new 24 month payment
        plan at the new model’s price is not the same thing in my mind as starting a 20-month payment plan and owning a two year old phone at the end of 24 months.
        We both made unwarranted assumptions, except you got paid for yours 😉

        • Actually, it seems my assumptions were warranted. The economics are exactly what I said they were.

      • Rob bennet

        Jan, given that currently , ~98% of iPhone users choose to keep the phone 2+ years[1], even with the issue of slowing due to updates, how big a shift the payment plan will create in demand for 1 year replacements ?

        Is there anybody who seriously tried to predict this ? or is just too early ?

        [1]http://www.phonearena.com/news/Survey-iPhone-users-more-likely-than-Android-users-to-upgrade-their-smartphone-once-every-two-years_id71418

    • kgelner

      You are mistaking a missing forest for a missing tree, in the keynote Apple stated the plan was to get a new phone every year. I’m assuming the “catch” if you can call it that is you trade in the old one.

  • guest

    Isn’t it cheaper to just buy the iPhone and sell it a year later and purchase the next model?

    • Space Gorilla

      Possibly, but it isn’t easier. People love easy.

    • DarwinPhish

      Potentially, but also riskier. Apple is essentially guaranteeing the future value of your iPhone.

  • Roy

    It’s much like the 19 year old walking into a car dealership that has no business buying the $50,000 car. He doesn’t even know how much it will cost, he doesn’t care. All he wants to know is. “What be da payment ?” It get’s repo’d a year later.

    • Space Gorilla

      It isn’t anything like buying a 50K vehicle. That’ll cost you about $600 to $700 per month to finance, depending on the dealer terms. The iPhone monthly payment is one cheap meal for two at a restaurant. And I think you meant to say that the 19 year kid asks “What will the payment be?”

    • DarwinPhish

      A better analogy is the person who leases a $50k car instead of buying a $35k car.

  • KevinD

    I think the Apple benefit isn’t at the end of year 1 when you get your installment plan extended for another 2 years and you get your 2nd new phone. It’s every following year when you get your new 2 year contract and new phone. Forever!

    Even clearer than any of the carriers were about lock-in. AT&T was never this obvious about how lock-in could work and give you a new contract and phone.

    The good thing for the Apple media is Apple is now locked into a twice annual upgrade. They will be able to put it on their calendar for a twice annual trip to San Francisco or Cupertino.

  • obarthelemy

    That’s a nice move for Apple
    – more 1st-degree revenue and margin (no commission to resellers, automatic AppleCare)
    – more lock-in (you can only switch every 2 yrs)
    – a nice influx of used phones they can resell as new, pocketing both the higher “new” price and sales that normally wouldn’t have gone through them.

    That’s on top of obfuscating the sticker shock, and getting a direct hook into customers.

  • Robert Hancock

    The only way this Apple scheme would work in Japan is to get a voice + data SIM on contract paid by credit card via one of the MNVOs such as IIJ, etc., because NONE of the mobile carriers here (SoftBank, Au, Docomo) sell SIMs without a 24-month phone contract and there are absolutely no prepaid voice + data SIMs due to a stupid 2006 law.
    Although Japan has been/is a hardware tech leader, it is stuck back in the 2000s for mobile services. This is going to cause problems for the 2020 Olympics when millions arrive and find they cannot buy a prepaid voice SIM from a corner store.
    I guess this is why it is launching in the US only to start and I expect it will never arrive here—dammit.

  • DarwinPhish

    I wonder how many 3rd parties are going to get into smartphone leasing and I wonder how many non-Apple iPhones project to have 50% or higher residual value after 12 months.

    • Almost none. iPhones hold their value much better than Androids.

      • obarthelemy

        Seems to depend on which Android brand ? Samsung seems to hold up well ?

        From https://www.gazelle.com/thehorn/2014/05/14/insider-secrets-getting-bang-smartphone-buck-gazelle-orange-book/ :

        • melci

          Although Gizmodo reports that Gazelle also says this:

          “No one wants to buy anything from you, gently used, unless it’s made by Apple. This isn’t opinion. It’s fact. We talked with executives from NextWorth and Gazelle, two of the largest sell-it-now, sell-it-easy operations out there,.. They agreed: Just buy Apple if you’re looking to get any cash back from your purchase…. “Not only do Apple products hold their value well, but the demand for them is extremely high,” Anthony Scarsella, Gazelle’s Chief Gadget Officer, told us. And not by a little. By a lot.”

          I think the comparison in the graph above from 16 months ago which compares the Galaxy S4 to the older iPhone 5 is probably distorted towards Samsung due to the age and smaller size of the iPhone 5. I suspect the graph will skew even more in favour of Apple once the hugely popular iPhone 6 starts to hit the second hand market in volume after the launch of the iPhone 6s.

        • DarwinPhish

          According to that report, the Samsung results are just for the Galaxy line. I suspect it’s predominantly the S and Not sub-brands. Also, the report is from May 2014 so it does not include the 5S, 6 or 6+.

          I found the results regarding upgraded storage very interesting. A $100 storage upgrade on an iPhone only gets you about $9 extra at trade-in. This suggests Apple’s new program will be of particular benefit to users who want the extra storage.

          • obarthelemy

            All Samsung’s Android devices are under the Galaxy brand, and all Galaxy devices run Android, so Galaxy == Android; high end vs low-end is indicated by the… sub-sub-brand… Samsung Galaxy Y vs Samsung Galaxy S6 Edge Plus. This dates back to when they also had relevant Windows Phone (ATIV) and Symbian and whatever else lines.

            The no-SD racket is sure working well for Apple ^^

      • Stevechang64

        That is true but interesting to see once this Apple plan and the carrier “jump” plans all start having the effect of thousands of iphones being returned and then put on the resale market. I’m sure the huge supply will drop the price of these used phones. Even though Apple has more interest in shipping these return phones to oversea markets.

  • Another benefit for Apple is it increases the number of people coming into an Apple Retail store to get an iPhone. Prior to this program, there was little if any advantage to getting the phone in Apple store vs. carrier store. More traffic means more opportunities for Apple to sell other items in the product ecosystem.

    Something I haven’t seen mentioned yet is the greater freedom this can give the consumer to switch carriers at any time if their unhappy with their plan. I wish I had this now because I made the mistake of switch to T-Mobile a year ago and I’d have to get my phone unlocked and pay off the installment plan in order to switch to AT&T. Am I overlooking something that would prevent the consumer from easily switch carriers under this new Apple program? Seems this could be a bigger threat to the carrier than just lost revenue from the hardware.

    • Stevechang64

      I don’t know who often people want to change carriers. I’ve been on TMobile for about 8 years now and like it. Others I know have been on AT&T for a decade and same for Verizon and they all like their carriers. So I think too much might be made about people wanting to change carriers. Sure it happens but I don’t believe it applies to most of us.

  • I think it should be emphasized that Apple effectively doubles their number of iPhone sales with this plan. Rather than a new phone sale every two years they get a new phone sale every year, a doubling of phone sales per individual. If enough people sign up for this program it has the potential to rocket yearly iPhone sales.

  • DarwinPhish

    The Full Terms are now available on Apple’s site (http://www.apple.com/legal/sales-support/iphoneupgrade_us/). If you exercise the
    trade-in option after 12 months, you enter into a new 24 month
    installment plan. Another 12 months later, you can trade-in again and
    effectively get a new phone every 12 months. Also, its clear that the Upgrade Plan is a loan based plan and not a lease.

    The one big catch I noticed is that you have to pay for all taxes up front. For example, the cheapest option is for a $649 phone plus $129 for AppleCare+. Your first payment will be $32.41 plus all the taxes (at, say 7%, that’s an extra $54.45 with your first payment). When you trade-in after 12 months, you have to pay the taxes up front for your new phone and new AppleCare+ contract. If you keep upgrading every 12 months, you are effectively double paying the taxes.

    The other catch is that there is no guarantee on pricing 12 months from now. You might start off paying $32.41 per month, but it will go up if you Apple raises the price of phones or if AppleCare+. This will probably be a bigger issue when Apple rolls this out internationally as prices fluctuate with changes in exchange rates.

  • Stevechang64

    You are assuming people enjoy paying two bills a month. I’d rather pay off my iPhone 6 plus and actually pay the $100 service for 4 lines at Tmobile rather then the $250 I’m paying now. Then also the phone becomes mine instead of giving back to them and I can donate it to a family member or keep using a perfectly great phone for another year or two. That to me makes best financial sense. Another thing to consider is Apple is now going to kill the phone resale market since used phones will flood the market more than ever before. Not maybe for the 6s but definitely when the 7 comes out and I can’t imagine anyone not wanting a free trade to that.

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