The New Smartphone Upgrade Cycle

on May 5, 2016

I’ve written a couple of times (here and here) for Insiders about smartphone upgrade cycles in the US. Today, I want to broaden the discussion a little and talk about something slightly different. This is something I touched on very briefly on the podcast this past week, but I’ll elaborate on it here. What’s becoming clear is we’re not just seeing a subtle lengthening of the smartphone upgrade cycle. We could start seeing a completely new behavior around smartphone upgrades which is much harder to predict than in the past.

The US Experience – Installment Plans Loosen Cycles

The focus of what I’ve written about in the past has been the specifics of the US wireless market, where the major carriers regularly report the percentage of their customers that upgrade their devices in any given quarter. The first of the two pieces linked above noted the introduction of installment plans for buying devices seemed to be accelerating the rate at which people upgraded their devices, based on the evidence at that point. The second though, noted the effect was becoming more complex than that and there was a discrepancy between two groups within the US carriers — one set seeing accelerated upgrades and the other, slower cycles. With another quarter of reporting under their belts, the carriers are now showing a more consistent trend in favor of longer upgrade cycles:

US wireless upgrade rates Q1 2015 and 2016

This past quarter, every one of the four major US wireless carriers saw a lower upgrade rate than a year earlier. AT&T and Sprint saw upgrade rates 1.6 percentage points lower year on year while, at T-Mobile and Verizon, the difference was one percentage point and 0.7 respectively. That makes for an average of 1.2 percentage points fewer upgrades in the quarter which, in turn, would mean over five percentage points fewer in the course of a year. Based on historic averages, that could mean a drop from 33% to 28% upgrading their phone each year, or a lengthening of the average cycle from around three years to closer to four years.

That’s a subtle shift, but still an important one – those few percentage points translate into millions of phones not sold this year that would have been sold last year. As long as the smartphone base continues to grow, the slowing upgrade rate is offset somewhat by new customers coming into the market, but the former effect is going to outweigh the latter going forward.

A Different Approach to Upgrade Cycles

The worry here is this isn’t just about a change in the way people buy phones in one market – the US. It happens to coincide with that trend in the US but there’s actually something else going on here as well. In the past, two-year smartphone upgrades were not just driven by the carriers’ approach to contracts but by strong consumer preference to regularly replace their phones. Major device makers have always ensured the two-year cycle looked attractive to consumers, with Apple in particular making cosmetic external changes on that basis for most of the history of the iPhone. But what happens if consumers stop thinking in those terms? What if, instead of upgrading every two years by default, they make a conscious decision each year to evaluate that year’s new hardware and decide to skip some versions? What if they skip two?

Now, some people have obviously always done exactly this – we all know someone who’s still carrying around a four or five-year-old smartphone and sees no reason to upgrade. They’re the reason why reported upgrade cycles have already hovered around three years rather than two – these are averages after all and, for every person who upgrades their phone annually, there are others who keep them for half a decade. The difference now is that even those who went with the default two year option previously are starting to change their behavior.

The example of Samsung’s Galaxy S6 last year is a great starting point for thinking about this. The hardware was significantly redesigned, with more metal and glass and less plastic, and the specs were also given a nice bump. But figures suggest many would-be upgraders simply passed on that device and decided to hang onto their S4 for another year. This year, Samsung continued with much the same hardware design, but is seeing better sales in the early running. What made the difference? Small tweaks like restoring external storage and waterproofing convinced people who took a pass last year to upgrade this year instead. People didn’t want to give up those features and were content to keep the older device they had and wait another year.

Consider the iPhone SE, Apple’s first premium 4-inch phone in two and a half years. Yes, Apple still sold 30 million 4-inch phones last year, but how many more people just held onto their aging iPhone 4, 5, or 5s? Just as some people seem content to forgo short-term personal relationships while waiting for Mr or Miss Right to come along, so some smartphone users are now happy to wait for the right device to come along. The iPhone SE takes advantage of this trend by tapping into specific unmet needs during a time when many have put their upgrades on hold.

Broad Implications for Phone Makers

The downside, though, is in the context of annual smartphone release cycles, misfiring just once could now be more costly than ever for phone makers. Leave out a feature many people rely on or simply fail to provide a really compelling new feature for people to hanker after, and you could miss out on an entire year’s worth of upgrades. Whereas the two-year cycle could be counted on to drive decent upgrades almost regardless of the hardware in the past, each new release now has to justify those upgrades much more. This puts lots of pressure on, for example, Apple’s next iPhone this fall and its ability to drive another big upgrade cycle. Tim Cook keeps reporting record numbers of Android switchers, but we’ve heard little recently about upgrade rates. Back in January, some 60% of the pre-iPhone 6 base still hadn’t bought one of the new handsets (we didn’t get an update on this stat in April). What if that pattern of behavior continues or worsens with a hypothetical iPhone 7?

Beyond Apple, smartphone makers in general are going to have to start thinking in new terms about smartphone upgrade cycles and what those look like going forward. On the one hand, it means doing whatever they can to make the two-year upgrade as attractive as possible, with significant performance improvements and new features. But it also likely means adjusting to the reality that the average cycle is going to continue to lengthen, which has dramatic implications in an increasingly saturated global premium smartphone market.