This new instalment plan is a direct response to the sudden prevalence of equipment instalment plan (EIPs) in which devices are paid for via instalments rather than through subsidies embedded in fixed-term contracts.
This is recognition by Apple that it had to adjust its pricing and distribution models to the changing American and European smartphone market which are quickly breaking away from the venerable two-year contract and accompanying device subsidies.
The iPhone Upgrade Program, currently in the US only, is a combination of a leasing programme and EIPs as consumers can choose to upgrade their iPhone each year or 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, which amounts to $384 for a year's worth of product use, and $768 to keep the phone after two years. This price includes AppleCare+ coverage which provides insurance for accidental damage to the device.
We believe many Apple customers will be tempted by the one-year trade-in option meaning more users will update to the newest model rather than skipping one iPhone upgrade cycle.
The ability to upgrade every year will boost volume sales of new iPhones as customers on EIP options typically pay back their devices over a two-year timeframe. This should result in Apple increasing its smartphone share.
For operators, Apple’s move is part of a worrying trend as it breaks down one key link with subscribers. Without contracts and SIM-locked phones, operators will be seen as connectivity providers only and will need to stress network quality to differentiate themselves between each other.
By selling unlocked iPhones in a subscriber environment void of fixed-term contracts, Apple makes it easy to change carriers. We expect this dilution of the subscriber relationship will result in a higher level of subscriber churn in the US market, and could work to the advantage of disruptors T-Mobile and Sprint.
European operators are bound to monitor 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 shows how sensitive the subscriber-operator ecosystem is and carriers in Europe should wait to see the real impact on the US market before embracing EIPs themselves.
That said, it is interesting operator O2 in the UK coincidently introduced an iPhone upgrade programme today, which allows subscribers to get new device every 12 months. This is similar to Sprint’s iPhone Forever plan in the US.
For Apple, this support for shortened replacement cycles will be a big plus. Never before has the iPhone been this independent from carriers. The increasing preference of subscribers to use app-based over-the-top services rather than operator services and identities had already diluted operator stickiness.
Consumers could begin buying or leasing unlocked iPhones directly from Apple or carriers offering similar instalment plans. Users could churn between carriers as they see fit, but maintain an unending relationship with Apple through monthly payments.
No other smartphone maker has the consumer distribution channel or cash resources which Apple has. Other smartphone brands will need to strengthen their existing partnerships with operators and retailers as Apple goes its own way.