Apple iPhone installment plan and similar device buy back programs core to carrier and OTT customer acquisition and retention strategy
Austin, Texas-based industry analyst, Iain Gillott stopped by the RCRatx Studio Lounge this week for a detailed discussion of the Apple iPhone Installment Plan. Check out this video and his opinion article below.
iGR Opinion: Apple’s iPhone Installment Plan: The good and bad for the mobile operators
Last week, Apple announced a new installment payment plan for the iPhone – along with the iPhone 6S models, new Apple TV and a bunch of other stuff. Basically, the iPhone Upgrade Plan allows a consumer to pay monthly and get a new iPhone every 12 months. The commitment is for 24 months; if the user gets a new iPhone after 12 months, the plan renews for another 24 months. The user must trade in the old iPhone to get the upgrade. AppleCare+, financed through Citizens Bank, is included in the Upgrade Plan and goes some way to justifying the cost, which starts at $32.41 for 24 months for an iPhone 6S.
For Apple, the Upgrade Plan offers several obvious – and perhaps a few not-so-obvious – benefits:
- Apple gets to sell a new iPhone every year to the Upgrade Plan users, which obviously will keep the flow of iPhones moving out of the factory gates;
- iPhone sales will likely become more predictable as users start taking advantage of the Upgrade Plan;
- The plan keeps consumers coming back to the Apple store or through the online portal to get their next iPhone, rather than going to a mobile operator store. Apple is no doubt anticipating some uplift in accessory sales (cases, Beats headphones, etc.) when consumers pick up their new iPhones;
- Importantly, Apple gets a steady supply of used iPhones to refurbish and offer back as replacements for AppleCare warranty claims and other sales; and
- Of course, Apple is able to further marginalize the role of the mobile operators, since the iPhones sold under the Upgrade Plan are unlocked and the consumer may never need to visit a carrier store again.
For the mobile operators, Apple’s new plan is both good and bad.
The good news is that the operators no longer will have to finance the purchase of iPhones – Apple will take this responsibility. Think back to last quarter’s financial results from Sprint and its announcement that it was looking at setting up a separate company to offer device installment plans to consumers. While Sprint said it has not made a decision on this, it is highly likely it will be an off-books company. Sprint is doing this, of course, to reduce the financial burden of device financing on the carrier. In the old days (2014!), mobile operators subsidized the cost of the device in exchange for a two-year contract. Now, with installment plans, the operators do not require contracts but are still carrying the financing cost of the devices.
Apple will now take some of that responsibility from the mobile operator, so all the operator has to do is sell a plan to go with the iPhone – no more financing the device itself. This will offset a lot of cost and, importantly, cash and allow the operators to focus on what they do – run networks. Verizon Wireless’ new TV ads are (again) focused on the quality of its network and emphasize the investments the company has made. Verizon Wireless is not saying “come get a smartphone from me,” it is saying “use your smartphone on the best network – ours.” This is a subtle difference but important: In the new world, operators run networks and Apple sells iPhones.
The bad news for mobile operators comes from the fact that consumers will no longer need to visit their stores to get a new iPhone. While some people order their iPhones online and get them shipped directly, the majority of people visit a store to get the iPhone. In my case, I usually order online, from the mobile operator website, and pick it up from the store. Now, I can just go to Apple and either get the iPhone shipped or pick it up in the store. In the past, I had little reason to go to the mobile operator store; now I have none, barring a billing or customer service issue that cannot be resolved online.
Operator stores are expensive to build and operate; the carriers assume that the majority of people will need them. Back to Sprint again, they recently did a deal to acquire many of RadioShack’s old stores; this was done to increase the distribution points. Apple’s announcement now begs the question if Sprint’s decision was a smart one.
But of bigger concern to me are the long-term implications for the consumer-carrier relationship. Apple addicts already love Apple way more than their carrier. Now that Apple is selling unlocked iPhones on installment plans, the operator is further marginalized. Yes, Apple’s Upgrade Plans are more expensive than the equivalent from the mobile operator, but how many iPhone users will happily pay a few extra bucks to Apple to avoid having to deal with the carrier? And how many Android or Samsung users would do the same if they could buy on installment from Google or Samsung? Quite a few I think.
How long will it be before Apple starts offering a choice of mobile operator on the iPhone? In other words, just select which operator you want in “Settings” and Apple will make it happen. Tired of AT&T Mobility? Switch to Verizon Wireless. Tired of Verizon and want Sprint? Away you go.
We have talked in the past about Google’s original plan to offer the “best” network with their own MVNO; the Upgrade Plan is likely Apple’s first step in this direction. Next will be a universal SIM and then the on-device software to enable a switch.
For the mobile operators, the message is clear: Offer the best service you can at the most competitive rates. Focus on the network and service. Be the best network operator you can be. Because Apple (and others?) are taking your role as device distributor.
