Unlocked and Loaded

Apple’s New iPhone Financing Plan

Apple_logoYesterday, among new hardware announcements at a company event in San Francisco, Apple introduced an iPhone financing plan called the iPhone Upgrade Program. The scheme is a direct response to the sudden prevalence of equipment instalment plans (EIPs), in which devices are paid for in portions rather than through subsidies embedded in fixed-term contracts. This is Apple’s recognition of the need to adjust its pricing and distribution models to the changing European and US smartphone markets, which are quickly breaking away from the venerable two-year contract and accompanying device subsidies.

The iPhone Upgrade Program is a combination of a leasing scheme and EIP, giving consumers the choice to upgrade their iPhone each year or to buy the phone outright after two years. Prices for the plans start at $32 per month for a 16GB version of the new iPhone 6s. This amounts to $384 for a year’s worth of product use and $768 to keep the phone after two years, and includes AppleCare+ insurance. We believe that many Apple customers will be tempted by the one-year trade-in option, meaning more users will update to the newest iPhone model rather than skipping an upgrade cycle.

The ability to upgrade every year will boost volume sales of new iPhones as customers on EIPs typically pay back their devices over a two-year time frame. This should help Apple to increase its smartphone share.

Apple’s move is part of a worrying trend for networks as it breaks down a key link with subscribers. A lack of contracts and SIM-locked phones will mean operators are seen simply as connectivity providers, and will need to stress network quality to differentiate themselves — Apple’s sales of unlocked iPhones in an environment void of fixed-term contracts will make it easy to change carriers. We expect this dilution of the subscriber relationship to result in a higher level of churn in the US market, and could work to the advantage of disruptors Sprint and T-Mobile.

European operators will be monitoring Apple’s move closely, as the long-term ramifications of change can be significant. The Un-carrier announcements made several years ago by T-Mobile USA show the sensitivity of the subscriber–operator ecosystem, and carriers in Europe should wait to see the real effect of EIPs on the US market before embracing the plans themselves.

O2 in the UK coincidently introduced an iPhone upgrade programme today, allowing subscribers to get new device every 12 months. This is similar to Sprint’s iPhone Forever plan in the US.

This support for shortened replacement cycles will be a big advantage for Apple. The iPhone has never been so independent from carriers. The increasing preference of subscribers to use app-based, over-the-top services rather than operator facilities and identities has already diluted operator stickiness. Consumers could begin buying or leasing unlocked iPhones directly from Apple or from carriers offering similar instalment plans, churning between operators as they see fit but maintaining an unending relationship with Apple through monthly payments.

No other smartphone maker has the consumer distribution channel or cash resources enjoyed by Apple. Rival brands will need to strengthen their existing partnerships with operators and retailers as Apple goes its own way.

This Daily Insight was first published by City A.M.

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