New Wireless Upgrade Plans Could Boost iPhone Sales

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Olga Kharif and Callie Bost for Bloomberg 2013-07-29 13:57:59 UTC

U.S. wireless carriers are making it easier for customers to upgrade phones more often. That's welcome news for consumers and could also provide a much-needed lift for Apple Inc. (AAPL) and Samsung Electronics Co.

Verizon Wireless is following AT&T Inc. (T) and T-Mobile US Inc. (TMUS), which earlier this month gave users an option to replace devices as often as every six months, rather than two years — the typical contract period for U.S. cellphones. Smartphone makers could use the help as they grapple with falling prices and a maturing market.

The success of the carriers' upgrade-friendly strategy, which lets consumers pay for a phone in monthly installments instead of an upfront fee, depends on the bulk of their customers reacting like Mona Khanna, a physician in Chicago.

"We live in an ADHD world, and I need it now and fast," Khanna said. "The iPhones — they are your cameras, phones, computers — you need to have the latest technology."

Khanna plans to soon switch from Verizon for a new, more flexible AT&T plan with calling from overseas. If enough consumers behave similarly, smartphone unit sales should increase by as much as 10% to 15% a year, said Roger Entner, an analyst at Recon Analytics LLC.

With the carriers' new terms, "you'll have people who go from upgrading every 24 months to 12 months, and people who used to upgrade every 12 months changing to six months," he said.

Speeding up smartphone users' buying patterns is just what device makers need right now. More than 60% of U.S. mobile subscribers already have smartphones, according to Nielsen Co. Average prices are likely to drop to $285 this year from $300 in 2012, said Chetan Sharma, an independent wireless analyst. And both the high-margin Apple iPhone and Samsung Galaxy S4 sales are showing signs of growth fatigue.

Samsung Struggles

In the quarter that ended in June, iPhone sales advanced 20% to 31.2 million units. A year earlier, Apple reported unit sales up 28% over 2011.

Natalie Kerris, a spokeswoman for Cupertino, California-based Apple, didn't respond to a request for comment.

Samsung's flagship Galaxy S4 handset is also struggling with growth in a mature smartphone market. Samsung reported sales for the Galaxy S4 this month that fell short of analysts' projections.

Jessica Redman, a spokeswoman for Suwon, South Korea-based Samsung, declined to comment.

U.S. smartphone shipments will reach 137.3 million this year, up 14% from 120.1 million units last year, said Kevin Restivo, an analyst at research firm IDC in Toronto, helped in part by the new wireless plans.

"Mobile Enthusiasts"

"These plans appeal to people that are interested in the latest and greatest phones — those that are real mobile enthusiasts and can think ahead and know that they need more than one upgrade in the two years," Restivo said in an interview.

The extent to which the new policies ultimately benefit handset makers may hinge on how much inventory carriers already have ordered. Verizon Wireless, for one, may use accelerated device upgrades to reduce unsold iPhone inventory.

As prices fall, smartphone makers also aren't getting as much revenue per phone. Device makers may see just a modest single-digit percentage gain in annual sales, according to Roger Kay, an analyst at Endpoint Technologies Associates.

Apple, which tends to release new iPhone models once a year in the summer or fall, stands to gain the most from the new policies because users wouldn't have much difficulty timing contracts to qualify for replacements each time a new version comes out, Sharma said. Other device makers roll out new handsets on more sporadic schedules.

For some users accustomed to comparison-shopping, the new plans will only be enticing if they bring significant savings.

"If they're charging you more to upgrade, I think it's going to be a dismal failure," said Gary Austin, an AT&T customer for two decades who got an iPhone right after the handset debuted in 2007. "If they didn't charge me a fee to do it, I would maybe consider doing it."

Image: Flickr, Yutaka Tsutano