Apple's iPhone installment plan threatens carriers' ties to customers

U.S. mobile operators may rue the day they trained customers to buy iPhones on installment, says analyst

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Apple's announcement Wednesday of its own iPhone installment plan, tucked toward the end of what CEO Tim Cook called a "monster roll-out," was the big deal of the morning-after talk about smartphones, analysts said.

"If you like to have a new iPhone every single year, this is the best way to do that," proclaimed Philip Schiller, Apple's head of marketing, during the Wednesday event. He spent just seconds outlining the iPhone Upgrade Program.

Customers walk into an Apple retail store after making an appointment -- the program will be initially available only in the U.S., and is restricted to Apple's brick-and-mortar outlets -- select an unlocked iPhone, choose a carrier, and then pay for the device over a 24-month stretch. That phone will be covered by the AppleCare+ aftermarket warranty, which includes accidental damage coverage.

At each one-year anniversary of the first purchase, customers may upgrade to the newest iPhone, but must extend the contract another 24 months to do so.

"It's a 24-month installment, but you can get a new iPhone every single year," Schiller said.

Monthly prices range from $32.41 (for an iPhone 6S with 16GB) and $36.58 (iPhone 6S Plus, 16GB) to $40.75 (iPhone 6S with 128GB) and $44.91 (iPhone 6S Plus, 128GB). Those prices are higher than typical carrier-driven installment costs, which Apple said start at $27 and $31 for the 16GB 6S and 6S Plus, respectively, although Cupertino's financing program includes the additional warranty. In-contract upgrades are commonplace features of U.S. carriers' installment plans.

"This is going to be a very powerful offering as customers go directly to Apple," said Patrick Moorhead, principal analyst at Moor Insights & Strategy, in an interview Wednesday. "It's a big deal."

In actuality, Apple and mobile carriers, while ostensibly partners, have always been in a highly competitive battle for their shared customers. Moorhead called it a "tug-of-war" over locking in consumers. Carriers want to get customers, but more importantly, keep customers, the reason for their long-term contracts, the motivation for subsidizing smartphone purchases.

Apple, meanwhile, wants the same: Get the customer on an iPhone, keep the customer coming back for the next iPhone, or in the old-school model, coming back for every-other iPhone.

The iPhone Upgrade Program is Apple's big pull in that tug-of-war; the Cupertino, Calif. company wants to weaken a customer's relationship with the carrier and strengthen the ties to itself.

And the carriers let it happen.

"Carriers may be kicking themselves, because by moving to installment plans they're training people that they don't need carriers to subsidize the iPhone," said Jan Dawson, chief analyst at Jackdaw Research. "They've handed Apple this huge opportunity," he added, to scrub themselves from the smartphone-buying equation. "Carriers have weaned customers from subsidies and trained them to understand and accept the installment model. They've done the heavy lifting."

Then Apple waltzed in.

Like Moorhead, Dawson saw Apple's move as an attempt to build stronger ties to customers. Because the program relies on people traipsing to an Apple Store -- or probably to its online mart at some point in the future -- where only iPhones are sold, it eliminates the influence of carriers and their salespeople, who in their stores pitch alternatives, primarily Android devices.

"Apple's locking [customers] into the iPhone so that they don't go anywhere else," Dawson said.

In a follow-up analysis published on Tech.pinions Thursday, Dawson elaborated on the iPhone Upgrade Program.

"In some ways, [this was] the most underestimated announcement Apple made," Dawson wrote. "It's quite possible the carriers have opened the door to a trend that may well come back to bite them."

By opening that door, carriers risk losing some customer patronage and interaction -- the iPhone purchasing part -- which, the argument goes, dilutes the relationship, threatening higher churn rates that in turn would increase carriers' customer acquisition costs. "Customers on the iPhone Upgrade Plan can take their unlocked devices to another carrier whenever they want to," Dawson observed.

Although Dawson is not a financial analyst, he regularly parses technology companies' revenue statements, including those of carriers. He called Apple's installment deal a significant threat to mobile operators. "Longer term, this could put a huge dent in carrier revenue, although not in profit," he said, pointing out that there is little if any profit in selling devices. "It makes you [as a customer] a free agent. You can change carriers month to month, cancel at any time."

It's not all about the customer: Apple would be more than happy to shift the bulk of its customers toward an annual replacement cadence rather than the nearly two-year average now. But Moorhead and Dawson cast it as primarily a way for Apple to wrap itself even more around the customer.

"It makes it a lot easier to stick with Apple," said Moorhead.

"Apple's getting the greater share of the customer relationship," Dawson echoed.

And if that's the case, carriers are getting a lesser share. "They've played right into Apple's hands," Dawson wrote on Tech.pinions. "They might well rue the day they embraced the move away from subsidies."

This story, "Apple's iPhone installment plan threatens carriers' ties to customers" was originally published by Computerworld.

Copyright © 2015 IDG Communications, Inc.

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