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The iPhone Upgrade Program means good things for the handset

The iPhone Upgrade Program means good things for the handset

December 15, 2015

Quite a few folks, including those of us here at AppAdvice, were quite surprised when Apple announced its iPhone Upgrade Program. Analysts quickly touted the benefits for Apple in the program, but nobody could really tell whether or not consumers would see anything in it for them. Piper Jaffray’s Gene Munster, for example, figured that a mere 15 percent of new iPhone customers would opt into the program.

In fact, Munster learned that his prediction was quite a bit off the mark. According to a report from Fortune, Munster issued a note to clients late Monday, Dec. 14, reporting on the results of a November survey of 188 iPhone 6s purchasers. Of those consumers, 70 people, or 37 percent, chose the iPhone Upgrade Program. Munster now believes that by the end of the quarter, the actual rate could be as high as 50 percent.

Because of how the deal is structured, the iPhone Upgrade Program is good not just for consumers, who get an inexpensive lease with benefits and the ability to upgrade each year, but also for Cupertino itself. This program, Fortune describes, has a number of very distinct positives for Apple:

  • It gets to sell more high-margin AppleCare+ contracts
  • It locks customers into the iPhone indefinitely
  • It halves, in theory, the iPhone upgrade cycle (to 12 months from 24)
  • It builds an inventory of used phones that can be refurbished and resold
  • It takes control of, and legitimizes, the grey market for second-hand iPhones
  • It unbundles hardware costs from carrier costs
  • It leaves cell service complaints clearly in the carriers’ hands
  • It could raise, according to RBC Capital, Apple’s iPhone profit margin from 50% to 55%.

Munster believes that eventually, 75 percent of Apple’s iPhone customers will move to an annual upgrade instead of waiting to get a new device every two years. This would lift Cupertino’s sales of the iPhone in the United States by 10 percent over the next three years.

There’s another way that the iPhone Upgrade Program could be good for Apple, iPhone customers, and the handsets themselves. In order to encourage annual upgrades, Apple may have to provide a compelling reason to change devices. This could mean accelerated advances in the iPhone’s technology, assuming Cupertino can continue to innovate and come up with new ideas for the handset. I have no doubt that the secret research lab at Apple is capable of that, so I’m looking forward to seeing what the next few generations of iPhones bring to the table now that Apple is pushing for annual upgrades.

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