Taylor Davidson · Apple's iPhone Upgrade Program

How an installment purchase plan is yet another wedge into the mobile industry.
by Taylor Davidson · 12 Oct 2015

The new iPhones came out a couple weeks ago, and what interested me the most, more than any of the new product features, are the new financing options now offered by the US carriers and Apple. US carriers are moving people away from one- and two-year contract structures toward installment or leasing plans that typically offer shorter timeframes for people to upgrade their phones. And so, for many people looking to buy an iPhone 6s or 6s+, there’s a potentially confusing array of new ways to buy one’s phone: no longer is it a simple up-front price with a monthly fee and a contract length, but a new set of terms and arrangements all marketed differently by each carrier. [1]

The Wirecutter’s How to buy an iPhone 6s or 6s Plus and The Verge’s How to buy the Apple iPhone 6S outline the various payment options [2], but to me, Apple’s iPhone Upgrade Program might be the most interesting installment option of all, from a business strategy perspective. Ben Evans covers the strategy behind “subscription iPhones” here - namely, quicker upgrade cycles handled through Apple means more refurbished iPhones sold through an Apple-owned secondary market, a smart move that also allows Apple to provide a “cheaper” iPhone without having to build crippled iPhones.

Apple iPhone Upgrade Program monthly pricing

That said, the process of buying a phone through the upgrade program appears intentionally crippled. There’s no way to “reserve” or pre-order a particular phone model except for same-day purchases, which effectively means all you can do to buy the phone you want is to check the inventory at your closest store(s) each morning. Want your phone immediately? Pre-order, buy or reserve through a carrier. Want to purchase through the Apple upgrade program? Check the web everyday to see if your phone is in stock. An intentional choice to reduce early channel conflict with the carriers? Perhaps. [3]

See, the installment program is more than just a financing option, but potentially part of a brilliant long-term business strategy to pull more dollars and relationships away from the carriers and towards Apple. While it still appears unlikely that Apple will launch their own wireless service, Apple’s moves to launch a clean financing option for purchasing phones, their own carrier-independent SIMs (albeit only for iPad), as well as backing the eSIM standard, are all moves in the direction of launching something.

Would the next move be their own wireless service? I doubt it, even though it’s well within their capabilties. [4] Mobile virtual network operators (MVNOs) aren’t terribly new, as there are dozens of MVNOs in the USA. The model is simple: create (or leverage) a brand, sign an agreement with a carrier to resell wireless service, and sell. Apple unquestionably has the brand and the assets to create their own wireless service. But why would Apple want to own and operate a service with drastically different economics and margins? It wouldn’t make sense. It’s conjecture, but to me, it’s more likely that Apple will continue to chip away at the economics and customer relationships of the carriers, using that power to launch a new kind of wireless service, perhaps carrier-independent.

Each product launch thickens Apple’s wedge into the wireless service industry. Remember how crippled the first iPhone was compared to competing handsets? Time will tell.

  1. Hidden behind the low monthly payments is the reality that customers are now paying the full price for the phone, meaning that the handset subsidies are going away with the contracts. No longer are you paying $199 with a two-year contract for a phone that otherwise costs $649; you’re now paying $27 a month for 24 months, resulting in you paying the full $649 over time. Where are the subsidies going? Some carriers have reduced monthly service fees through line credits, or special buy-back offers that reduce the net cost, but it’s not apparent that the full cost of ownership is going anywhere but up. The trade-off: for that extra cost, you’re getting the ability to trade-in your phone for newer models more frequently than every two years (T-Mobile, for example, is pushing their plan’s “3x a year” upgrade policy as a big benefit, a nice effort in selling a feature that few will really use). ↩︎

  2. Also: I’m curious if this re-education process has an impact on carrier churn. Will more people switch carriers than before, is this a larger-than-normal one-time switch event? ↩︎

  3. I’m curious what will happen when the next iPhone is released. Will Upgrade Program members get the first place in line, or the last? ↩︎

  4. Btw, I used to focus on the wireless industry, and worked as a wireless industry strategy consultant from 2004-2005, where I worked on MVNO strategies for a number of clients. ↩︎