The benefits to Apple of getting into the smartphone leasing business are numerous (we’ll enumerate them in a minute), but the biggest one is that it virtually (see note) locks customers into the iPhone—and the Apple ecosystem—indefinitely.
What wasn’t clear three weeks ago when Tim Cook unveiled the financing scheme it calls the iPhone Upgrade Program was how many customers would take the bait. The company hasn’t released any numbers, but some data points are starting to come in.
In a note to clients issued Thursday, RBC Capital’s Amit Daryanani reports that 20% of 6,400 customers surveyed already intend to sign up.
The deal is “gaining more popularity,” writes Daryanani. “Assuming 20% of the USA install base of ~200M units utilizes the upgrade program, this would result in ~$0.15 in EPS.”
For Apple, those 15 cents are the icing on a rich and sticky cake. Among other things, as we noted two weeks ago, the program…
- Commits customers into buying a new iPhone every year
- Sells more high-margin AppleCare+ contracts
- Halves the iPhone upgrade cycle (to 12 months from 24)
- Builds an inventory of used phones that can be refurbished and resold
- Unbundles hardware costs from carrier cost
- Incentivizes carriers to sweeten their iPhone deals
- Raises the iPhone’s gross margin, per an earlier RBC calculation, from 50% to 55%
If you’re the kind of iPhone owner who values Apple’s service and support and always likes to have the latest model, the Upgrade Program is a pretty good deal.
For Apple it’s even better.
NOTE: Several readers have pointed out that it’s not really a “lock.” Customers are not required to get a new iPhone every 12 months. One Twitter follower told me he just wanted an unlocked phone, and that he plans to stick with the iPhone 6S for at least two years. We’ll see next year at this time if he can resist the temptation to trade, for the same monthly fee, his 12-month-old iPhone 6S for a brand new iPhone 7. Assuming there is an iPhone 7.