Apple May Benefit From Ease Of iPhone 6 Upgrades

Apple May Benefit From Ease Of iPhone 6 Upgrades
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Apple Inc. has scheduled a big event for Tuesday, presumably to show off the iPhone 6. Fans will undoubtedly go ga-ga for the new smartphone, but just how many of them will upgrade to the new model? Bernstein analysts put together a list of the different ways people could upgrade without shelling out a ton of cash for the new iPhone.

Estimates for Apple’s iPhone 6 sales

In a research note dated Sept. 5, 2014, analysts Toni Sacconaghi, Jonathan Cofsky and Eric Garfunkel said they expect a 9% increase in iPhone units in the 2015 fiscal year. That’s even though the maturity of the high end of the smartphone market is increasing. The number of units declined modestly in the first halves of the 2013 and 2014 calendar years.

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However, they have four reasons for assuming the 9% iPhone growth rate.

Why Apple’s growth rate may be strong in 2015

First, they assume that the high end of the smartphone market will grow by 2%, which would add 3.3 million units to Apple’s growth. Second, they aren’t assuming that Apple adds any more carriers, but they do assume that another quarter of sales on the China Mobile network in the 2015 fiscal year will provide a meaningful benefit.

Third, they’re assuming 200 basis points of market share growth, which amounts to about 3.6 million units, due to consumers switching from Android to the iPhone 6. And fourth, they’re expecting to see a one month decline in Apple’s replacement cycle, which would add about 5.5 million additional units.

They note that this last assumption is probably the biggest because it could have the greatest effect on how many iPhone units Apple ends up selling in the beginning.

How many will upgrade to the iPhone 6?

The Bernstein team notes that in the six quarters before the iPhone 6 announcement, Apple will have sold about 220 million units. They say typically only a “modest percentage” of that number would upgrade to the newest model for a number of reasons.

They cite the high cost of buying a new phone when using a prepaid wireless provider. There are also restrictions on upgrading for those who are on postpaid plans. Nonetheless, they say even a “small percentage uptake” in the number of people who upgrade could significantly increase Apple’s numbers.

For example, adding only 5% of the installed base to the number of upgrades would result in an incremental 11 million units, which would be a 6% increase to Bernstein’s 2015 iPhone unit projection.

Upgrading this year and next

The analysts also offer several reasons for how consumers may be able to upgrade their iPhones easily and inexpensively. For example, they suggest that consumers could pay the full retail price for the iPhone 6 this year, which will probably be around $650, like previous models. They could then trade in their iPhone 5S, which trades for $300, thus implying a $350 upgrade cost.

They add that next year, consumers who upgrade like this will be eligible for a new phone at the end of their contract so that they can pay $200 to upgrade again to the iPhone 6S with the start of a new contract. The result would be two new iPhones in just two years for $250. They do note, however, that Apple may increase the cost of the larger iPhone model, which obviously would raise the upgrade cost accordingly.

Other upgrade options for the iPhone 6

Consumers could also cancel their plan and switch carriers. Going to T-Mobile makes the most sense because the carrier will pay early termination fees. They could also just exit their Verizon or AT&T contracts to pay the $205 to $230 fee and then pay for a new iPhone 6 on another carrier for $200, thus upgrading for around $450.

They note as well that some U.S. plans already allow consumers to upgrade early by trading in their current phone and upgrading to a new phone before the end of their two-year contract. In addition, international wireless plans are becoming more flexible. Some international carriers are offering early upgrade plans or other ways to cut down on the cost of upgrading.

iPhone 6 set apart from Apple’s previous models

In addition to all of the above factors, the Bernstein analysts also note that the new model is expected to be larger. They say this could spur consumers to seek out the cheapest way to get the iPhone 6. In addition to the bigger size, they also point to other differentiators that set the newest model apart from its predecessors.

For example, the HealthKit and HomeKit APIs and Touch ID APIs have the potential to set it apart. The phone will likely have health and connected home integration and possible mobile payment functionality. They say these options should be optimized for the iPhone 6, thus making it more attractive than previous models, even though they will get some of these features with the iOS 8 update.

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