It’s the holiday season, when thoughts naturally turn to gift ideas for your favorite CEO. No? Just in case, the most thoughtful seasonal gift you can give Apple CEO Tim Cook is replacing your old iPhone with a new one. And then replace it again next Christmas.
Smartphone sales are slowing sharply, now that the world has half as many smartphone subscriptions as people. That makes for a rapidly shrinking pool of potential first-time iPhone buyers in places like the U.S. and China, the world’s two largest smartphone markets. Smartphone companies are turning their attention to sales prospects in India, where Apple is practically nonexistent.
To keep growing for the time being, then, Cook has two basic paths. One, Apple can persuade people to switch from their Android phones or other smartphone systems. That pool is big, but users who bought a $100 Android phone won’t be an easy sell for a $750 iPhone. Or two, Apple can sell more iPhones to people who already have one. About 60 percent of iPhones sold this year went to existing iPhone owners, estimates Bank of Montreal analyst Tim Long.
Upgrades, then, are already a majority of iPhone sales. And they are also the swing factor most in Apple’s control.
All this matters because Apple's amazing growth Bacchanalia is over. Sales of iPhones now generate two-thirds of the company’s total revenue, and the number of new iPhones sold is expected to barely bump up in the fiscal year ending in September 2016. That would be the slowest annual pace for iPhone unit sales ever. Some pessimists even think iPhone unit sales may decline next year.
Smartly, Apple is taking matters into its own hands with help from its partners (and sometime antagonists), the U.S. mobile phone companies. Both are offering phone plans that let customers pay in monthly installments to purchase or rent phones with the option to trade in the devices for a new version each year or so. People on average have been holding onto their smartphones longer and longer, replacing them roughly once every two years. Apple’s idea is to make it more palatable for its users to buy the latest, and more expensive, model early. And repeat.
Apple hasn’t disclosed how many iPhones it has sold under its annual upgrade program, which starts at about $32.50 a month, including a warranty plan. The numbers are likely to be modest because the monthly payment option is available only in the company’s U.S. retail stores.
Mobile phone companies also are shifting to a confusing array of early-upgrade plans and away from the model under which people paid a couple hundred dollars upfront for an iPhone in exchange for a two-year service contract. So far, this carrier shift has given Apple a bit of a headache because consumers can now see the true cost of an iPhone rather than believing it costs $200.
Long term, the potential financial benefit is significant if Apple can squeeze the time between new iPhone purchases. Piper Jaffray analyst Gene Munster -- who is consistently bullish on Apple -- estimated if the company can persuade people on the installment pay plan to upgrade to new phones every 13 months, it would mean the average revenue Apple derives from each U.S. iPhone user would rise to $738 from $436 -- a 70 percent increase.
More than a year after the introduction of the larger-screen iPhone 6 line and then its successors, Apple says 30-something percent of iPhone owners have one of the newer models. That seems like a skimpy percentage considering the iPhone 6 was perhaps the most anticipated iPhone since the original.
There will always will be people who are perfectly happy to stick with the same phone for years because of costs or other factors. It’s possible new smartphone features have plateaued, making people feel less compelled to keep buying the latest and greatest phone. The glass-half-full view is that 60 percent or so of iPhone owners have models that are at least 2 years old and can be convinced to pay up for a pricier, younger model. All they need is a little nudge.
The upgrade program from Apple and the mobile carriers is a good nudge. So were the none-too-subtle “don’t those new iPhones look swell?!” messages that popped up recently when some people surfed to the iPhone App Store. Sure, this kind of (semi-) hard sell is “uncouth,” as longtime Apple commentator John Gruber called it, but sales growth trumps tact. Maybe Apple should be even more uncouth in the quest for upsells. Heck, hire mean-spirited New Yorkers to stand on street corners and knock old iPhones out of the hands of passers-by. I can recommend a few qualified candidates.
Upgrades are and should be a central focus for Apple now. Cook said in October that Apple's upgrade-friendly financing program is "the front end of a fairly major trend in the industry." It also signals a new, middle age phase for Apple. Now America’s greatest growth company needs to try harder and be more creative -- dare we say, uncouth -- to persuade people to buy iPhones.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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