iPhone Upgrade Program expected to boost Apple's margins, force carriers to more aggressive pricing

Posted:
in AAPL Investors edited September 2015
The new official iPhone financing plan is seen by investment firm RBC Capital Markets as a benefit not only to Apple, but also to its customers, both of whom should gain leverage over wireless carriers.




Analyst Amit Daryanani believes the iPhone Upgrade Program will drive customer loyalty from carriers toward Apple, and also force carriers to offer more aggressive pricing. Users who buy a handset through Apple's program receive an unlocked iPhone contract-free, meaning they are free to change carriers at any point.

Under the iPhone Upgrade Program, users are able to trade in their handset and exchange it for the latest model after the first 12 payments. The program is a 24-month, interest-free loan to pay off the cost of an iPhone and an AppleCare+ extended warranty.

Daryanani's thoughts were shared in a note to investors issued on Wednesday, a copy of which was provided to AppleInsider.

Apple hasn't yet announced what it plans to do with the iPhones that are traded in, but presumably the company will be able to resell those used handsets as refurbished and turn a healthy profit.

It's for that reason that Daryanani believes that Apple's gross margins will benefit from the new iPhone Upgrade Program. He sees margins increasing from an estimated 50 percent to as high as 55 percent due to a combination of factors, including more frequent user upgrades to the latest model.

Daryanani estimates that users currently wait an average of 26 months to upgrade their handset. That's slowed from 22 months in 2013, as carriers have moved away from subsidized pricing that lowers the price of a new handset in exchange for a new two-year service contract.

He believes many customers with two-year contracts ending in 2015 will opt to end their contracts and instead adopt Apple's upgrade program, which will enable them to upgrade their handset to the latest model on an annual basis.

"We think near-term this helps bolster share gains, increase customer stickiness to AAPL and enable a more competitive pricing environment for iPhones," Daryanani wrote.




His sentiment was echoed earlier this week by UBS and analyst Steven Milunovich, who views the iPhone Upgrade Program as a potential "big deal." He believes the plan will cause some customers to upgrade their iPhone more often, boosting revenue for Apple, and making the iPhone business more of an annuity.

AppleInsider analyzed the iPhone Upgrade Program last week and found it's a great deal for consumers who plan on buying AppleCare+ and would like to upgrade their iPhone once per year. Of particular interest is the fact that the iPhone sold through the program is unlocked, meaning customers can switch carriers or use their handset internationally at any time, with no contract commitments or restrictions.

RBC has maintained its "outperform" rating for Apple stock, with a price target of $150.
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Comments

  • Reply 1 of 45
    I was considering this program until I discovered that it's being done through a third-party bank and not through Apple. They should tag such programs to my iTunes/iCloud account so that all my Apple payments happen in one place.
  • Reply 2 of 45
    roakeroake Posts: 638member
    Please gut AT&T. Thank you!
  • Reply 3 of 45
    The T-Mobile deal is quite a bit better, though you then have to be on the T-Mobile network.
  • Reply 4 of 45
    lkrupplkrupp Posts: 7,067member
    Quote:

    Originally Posted by Roake View Post



    Please gut AT&T. Thank you!



    Dumb.

  • Reply 5 of 45
    MacProMacPro Posts: 18,223member
    I truly want to believe this is true and the carriers will lower prices, at the present, unless I am missing something, AT&T are a non starter at present for anyone wanting to use Apple's plan. I was looking at AT&T's rates for using your own iPhone yesterday. They offer only $300 off the annual bill, not a lot. So something has to change. I understand the iPhone would be owned and able to be sold at the end of the year but I can see this also causing a massive drop in the value of second hand one year old iPhones as the new Apple purchase plan gains traction. I would bet I can kiss my my 'grandfathered in unlimited data' goodbye too.

    I wonder if Apple now might consider buying a carrier in the USA and entering that business as a service to Apple users only, since competing isn't an issue with their own purchase plan in place?

    Last thought just now, why not the same purchase plan for iPads?
  • Reply 6 of 45
    MacProMacPro Posts: 18,223member
    sog35 wrote: »
    Awesome.

    This will make the carriers dumb pipes.

    They are in a bad place for sure, losing land lines and TV sales as folks cut them out and go 100% internet. They still have leverage there unfortunately. I'd like to see some Apple moves into the internet pipes and cellular service area too in the USA. They no longer have to worry about pissing off the AT&Ts of this world with this purchase plan in place.
  • Reply 7 of 45
    I disagree that people will end two year contracts. I still have unlimited data with AT&T on four lines. As long as they offer the 2 year contract it works out to be a better value over the two year period. Each year two lines are upgradeable. So we sell two phones, hand down two, and get two new every year with AppleCare. Usually selling the two phones pays for most of the cost of the subsidized phones.

    What all the carrier commercials and apple ads do not make immediately obvious is that the lease pricing is IN ADDITION to the carrier costs (minutes,text,data).

    I know entry of people who have walked into their carrier store thinking it was the price they saw on TV, only to find out it was double!
  • Reply 8 of 45
    They are in a bad place for sure, losing land lines and TV sales as folks cut them out and go 100% internet. They still have leverage there unfortunately. I'd like to see some Apple moves into the internet pipes and cellular service area too in the USA. They no longer have to worry about pissing off the AT&Ts of this world with this purchase plan in place.

    I can see it now, data caps and tiered data for home internet. That is the telcos big leverage stick.
  • Reply 9 of 45
    People going for the larger devices for just a few dollars more a month was my reasoning for this helping to push higher margins.
  • Reply 10 of 45
    I truly want to believe this is true and the carriers will lower prices, at the present, unless I am missing something, AT&T are a non starter at present for anyone wanting to use Apple's plan. I was looking at AT&T's rates for using your own iPhone yesterday. They offer only $300 off the annual bill, not a lot. So something has to change. I understand the iPhone would be owned and able to be sold at the end of the year but I can see this also causing a massive drop in the value of second hand one year old iPhones as the new Apple purchase plan gains traction. I would bet I can kiss my my 'grandfathered in unlimited data' goodbye too.

    I wonder if Apple now might consider buying a carrier in the USA and entering that business as a service to Apple users only, since competing isn't an issue with their own purchase plan in place?

    Last thought just now, why not the same purchase plan for iPads?

    Someone, on another thread, pointed out that AT&T can cancel your grandfathered unlimited data plan anytime they want to.

    I too would like to see a similar plan for the iPads.

    I do think this is a big deal for US customers ...

    But it could be an even bigger deal for customers in the EU and developing countries that never had subsidies.

    Essentially,, it positions the latest high-end iPhone as an inexpensive, consumable, necessity.

    ... The kids will no-longer be willing to accept a hand-me-down from the parents or grandparents.
  • Reply 11 of 45
    Quote:

    Originally Posted by digitalclips View Post



    I truly want to believe this is true and the carriers will lower prices, at the present, unless I am missing something, AT&T are a non starter at present for anyone wanting to use Apple's plan. I was looking at AT&T's rates for using your own iPhone yesterday. They offer only $300 off the annual bill, not a lot. So something has to change. I understand the iPhone would be owned and able to be sold at the end of the year but I can see this also causing a massive drop in the value of second hand one year old iPhones as the new Apple purchase plan gains traction. I would bet I can kiss my my 'grandfathered in unlimited data' goodbye too.



    I wonder if Apple now might consider buying a carrier in the USA and entering that business as a service to Apple users only, since competing isn't an issue with their own purchase plan in place?



    Last thought just now, why not the same purchase plan for iPads?

     

    Hmm...maybe you were looking at the wrong plans/info?

     

    AT&T charges me $15/month per line when I bring my own phone to a family share plan and go month to month. If I finance my phone via a 2 yr contract, they charge me $40/month per line.

     

    For the 128GB version, I'd be paying $399 up front and another $500 over 2 years with AT&T....for a total of $899. $49 more than it costs to buy it outright.

  • Reply 12 of 45
    lkrupp wrote: »

    Dumb.

    No it's not
  • Reply 13 of 45
    giffen wrote: »
    The T-Mobile deal is quite a bit better, though you then have to be on the T-Mobile network.

    It's true that it's better and T-Mobile is great in my area. I'll do their lease for a year then the Apple program next year as it's always a better experience working directly with Apple (especially now that they're leveraging their power against the carriers which should drive competition and benefit us).
  • Reply 14 of 45
    MacProMacPro Posts: 18,223member
    schlack wrote: »
    Hmm...maybe you were looking at the wrong plans/info?

    AT&T charges me $15/month per line when I bring my own phone to a family share plan and go month to month. If I finance my phone via a 2 yr contract, they charge me $40/month per line.

    For the 128GB version, I'd be paying $399 up front and another $500 over 2 years with AT&T....for a total of $899. $49 more than it costs to buy it outright.

    That is entirely possible. Our plan sounds nothing like yours but we have had it since the inception of the iPhone, hence the unlimited data and we have a buddy phone on the main account. I'd love it if Apple provide the 4G (or 5G) service too :), I'd actually trust Apple.
  • Reply 15 of 45
    Quote:

    Originally Posted by Dick Applebaum View Post





    Someone, on another thread, pointed out that AT&T can cancel your grandfathered unlimited data plan anytime they want to.



    I too would like to see a similar plan for the iPads.



    I do think this is a big deal for US customers ...



    But it could be an even bigger deal for customers in the EU and developing countries that never had subsidies.



    Essentially,, it positions the latest high-end iPhone as an inexpensive, consumable, necessity.



    ... The kids will no-longer be willing to accept a hand-me-down from the parents or grandparents.

    Hopefully the parents will still be parents and tell the kids to be grateful. I know if my 15 year old (Don't have kids yet) complained that a 2 year old iPhone is "not cool", I would say, "you are right." Smash or sell the phone and say: "Now you don't need to worry about it." Here is a brand new Nokia brick phone, it can make calls, that is about it. Go earn your own 650$+ phone.

  • Reply 16 of 45
    ATT next is a better deal...AppleCare coverage stinks compared to square trade and ST will even reimburse you for the second year if you get another phone. Two claims at 99 each? Terrible. I was still going to do it until I realized "contract free" means little when you have to still get a gsm or cdma phone...you get two to choose from! Thought apple fixed this...crossing fingers for next time!
  • Reply 17 of 45
    MacProMacPro Posts: 18,223member
    Someone, on another thread, pointed out that AT&T can cancel your grandfathered unlimited data plan anytime they want to.

    I too would like to see a similar plan for the iPads.

    I do think this is a big deal for US customers ...

    But it could be an even bigger deal for customers in the EU and developing countries that never had subsidies.

    Essentially,, it positions the latest high-end iPhone as an inexpensive, consumable, necessity.

    ... The kids will no-longer be willing to accept a hand-me-down from the parents or grandparents.

    I'm all in favor of this for so many reasons. Yep I am aware they can cancel my unlimited data, my point was I'd be volunteering to give it up so it makes the math a little more complex but I suspect not worth keeping

    The thing about hand me downs is they were mostly a few years old, now there will be a lot of very clean, one year old ones in a year or so so that market could be huge. Heck, I wouldn't mind a 6s next year that is in great condition for a low cost to take to AT&T or whoever. I am half expecting some bright spark to mimic Apple's plan on 1 year old iPhones, for $10 a month, a new one (as in year old new one) every year! :D
  • Reply 18 of 45
    seankill wrote: »
    Someone, on another thread, pointed out that AT
    Hopefully the parents will still be parents and tell the kids to be grateful. I know if my 15 year old (Don't have kids yet) complained that a 2 year old iPhone is "not cool", I would say, "you are right." Smash or sell the phone and say: "Now you don't need to worry about it." Here is a brand new Nokia brick phone, it can make calls, that is about it. Go earn your own 650$+ phone.

    Someone, on another thread, pointed out that AT&T can cancel your grandfathered unlimited data plan anytime they want to.

    I too would like to see a similar plan for the iPads.

    I do think this is a big deal for US customers ...

    But it could be an even bigger deal for customers in the EU and developing countries that never had subsidies.

    Essentially,, it positions the latest high-end iPhone as an inexpensive, consumable, necessity.

    ... The kids will no-longer be willing to accept a hand-me-down from the parents or grandparents.

    I'm all in favor of this for so many reasons. Yep I am aware they can cancel my unlimited data, my point was I'd be volunteering to give it up so it makes the math a little more complex but I suspect not worth keeping

    The thing about hand me downs is they were mostly a few years old, now there will be a lot of very clean, one year old ones in a year or so so that market could be huge. Heck, I wouldn't mind a 6s next year that is in great condition for a low cost to take to AT&T or whoever. I am half expecting some bright spark to mimic Apple's plan on 1 year old iPhones, for $10 a month, a new one (as in year old new one) every year! :D

    It occurs to me, that very subtly, the rules have changed.

    Until the iPhone 6S, each year I would buy 2 new iPhones, e.g. last year I bought a mid 6 outright for my daughter and a loaded 6 Plus for myself (need for development). Then, we would hand down the replaced phones to my grandkids.

    We have 5 iPhones on our ATT Shared plan -- so there are always a couple of lines that are available for a new 2-year contract.


    This year, my youngest grandson told me he wanted an iPhone 6S Gold 64GB -- and he would pay for it (he's very frugal, does lots of chores, earns $200-$300 a month & puts most of it in Savings).

    I told him about the Apple-Financed Upgrade plan -- he liked it (even though you couldn't do 1st day orders (I was told by Apple that the plan wouldn't be offered until 9/26).


    I was up at midnight (for other reasons) on order day -- and checked out the store, just to see how sales were going ...

    It was obvious that iPhones were selling fast -- so I ordered one for my grandson with ATT financing and AppleCare (same old, same old) for shipping on 9/25.

    I was watching comments on an AI forum and someone posted a link to where you could reserve an Apple-Financed iPhone for in-store pickup.


    So I did -- same iPhone available for pickup on 9/25.


    Yesterday, I cancelled the ATT transaction!


    This is where it's different ... My young grandson (the youngest of three kids) now will have the newest iPhone in the family ... and next year ... and the next ...

    "Badges Hand-Me-Downs -- I don't need no stinking' Badges Hand-Me-Downs !


    I suspect that next year, each family member will enjoy the cost-savings, protection and flexibility of using the newest iPhone of their choice.


    It would be icing on the cake if Apple were to allocate pre-order iPhones to those in the Apple Upgrade program.
  • Reply 19 of 45
    Quote:

    Originally Posted by Giffen View Post



    The T-Mobile deal is quite a bit better, though you then have to be on the T-Mobile network.

     

    I don't know, is it?  Still I'd be paying $40.75 a month through Apple's plan, when I'm paying $27 or something with T-Mobile.  I don't see the point of getting a new phone every year.  I had my iPhone 4 for 4+ years before upgrading to my iPhone 6.  While I like the new features of the 6S, I can just wait for the iPhone 7 and get that maybe.   T-Mobile's Network works the same around here as anyone else with the added benefit of Wifi Calling, which for me is HUGE because at work, the Signal is WEAK for all the Networks.  I have a Wifi Router about 2 feet from me in my Office.  Now I'm no longer running out the back door from my Office which is in about the middle of the factory to get a better signal, I can just relax and answer and it's nice and clear.  That and the free Music streaming now counting against your Data use with many music streaming services is really nice.  I steam all my music and in the higher quality.  Why not, it's free!!!

  • Reply 20 of 45
    rob53rob53 Posts: 2,030member
    Quote:

    Originally Posted by bloggerblog View Post



    I was considering this program until I discovered that it's being done through a third-party bank and not through Apple. They should tag such programs to my iTunes/iCloud account so that all my Apple payments happen in one place.

    The process is still handled through Apple, just like your iTunes/iCloud account is handled through Apple but uses a non-Apple credit card. I don't see Apple ever being a "bank" because there are just too many regulations and headaches. Apple will always use another bank, including credit card companies, instead. (Apple might only be setting up the Citizens Bank credit card account but I presume you'll still need to go back through Apple to get it renewed or to upgrade to a new phone.)

     

    Now, if they wanted to issue an Apple credit card with benefits, that would be something I'd be interested in. But again, I'd still have to pay that card off with my bank.

     

    “As the 13th largest retail bank in the United States, we deliver a broad range of financial services to over five million individuals, companies, not for profits, and institutions.” Citizens Bank is located in Providence, RI. It will be interesting to see if the number of individuals doubles after the Apple Upgrade Program is in full swing.

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