Americans Keep Their Cellphones Longer
April 18 2016 - 3:52PM
Dow Jones News
By Thomas Gryta
The death of the two-year cellphone contract has broken many
Americans from a habit of routinely upgrading their
smartphones.
Since the early days of Apple Inc.'s iPhone, most customers have
avoided paying for the full price for the latest model. But the
success of AT&T Inc. and Verizon Communications Inc. since 2013
in shifting customers into plans that force them to pay the full
price for devices -- and separate that cost from monthly service
fees -- has consumers holding on to their devices longer.
Citigroup estimates the phone-replacement cycle will stretch to
29 months for the first half of 2016, up from 28 months in the
fourth quarter of 2015 and the typical range of 24 to 26 months
seen during the two prior years.
"It's never good to be in a market where subsidy hides the real
cost of doing something," John Stankey, chief executive of
AT&T's entertainment group, said during an investor conference
last month. The technological advances that come in new models are
narrowing, he said, and many wireless customers "are no longer
thinking that they want to upgrade it every 12 months or 18
months."
Matt Szatkowski is planning to keep his phone -- potentially
until it no longer works. The 24 year-old who lives in Orange,
Conn., bought his iPhone 6 from AT&T in September using an
installment plan and paid it off in 18 months. Now that the $37.50
monthly payments are finished, he plans to wait as long as possible
to upgrade.
"I don't need one," he said, noting that while he may be curious
about the new phones' features, so far he doesn't feel a need to
upgrade. "This one works perfectly fine."
Previously, Mr. Szatkowski traded in his phones every two years
because the structure of his contract plan encouraged it. He called
the upgrade cycle a "marketing trap" and believes the features on
his phone will hold up for years.
Last year, Apple tried to combat that shift by introducing a
leasing program allowing customers to get a new device as often as
every 12 months. Fewer Americans, however, are buying their phones
directly from Apple, with three-fourths opting to purchase from
their wireless carriers in 2015, according to a study by Consumer
Intelligence Research Partners.
"In terms of the upgrade program itself, I think over time, it
will be meaningful as customers get into a different pattern,"
Apple CEO Tim Cook said during a January conference call with
analysts. "This has to do with wanting to provide customers a very
simple way to upgrade."
Smaller carriers Sprint Corp. and T-Mobile US Inc. also offer
phone leases with frequent upgrades. AT&T and Verizon -- the
two biggest players, with about three-quarters of the country's 246
million mainstream cellular subscribers, according to UBS, don't
offer such a leasing option. Most AT&T or Verizon customers
must either buy their new phones upfront or pay in monthly
installments.
Sprint said 55% of its customers buying a phone choose leasing.
T-Mobile said it hasn't seen a drop in upgrade rates in recent
quarters. At the end of the lease, a customer has to either return
the phone or make a one-time payment to buy the device.
Analysts see the longer device life as positive for the carriers
because it could lead to fewer service cancellations or defections
in the competitive industry. "Handset sales are the main trigger
for customer activity and movement among the carriers," UBS analyst
John Hodulik said in a recent note to clients.
In 2015, about 30% of the U.S. postpaid phone base upgraded
their device, according to UBS, down from 32.5% in 2014 and a high
of 35% in 2011. The firm expects an all-time low 6.2% of the base
to upgrade in the first quarter, down from 7.2% a year ago.
The longer upgrade cycle lowers equipment revenue for the
telecom companies, but Verizon's Chief Financial Officer Fran
Shammo argued last month that the top-line shift is painless.
"In this world where the customer is paying full price for the
phone, it has less of an impact regardless of where volume is," he
said. "I record $1 dollar of revenue, I record $1 of cost, it is
zero profit because everybody is selling them at cost."
The shift isn't as benign for Apple.
BTIG analyst Walter Piecyk recently cut 10 million units out of
his fiscal 2016 and 2017 iPhone estimates because of shifting
upgrade rates in the U.S. "We have broader concerns that there is a
structural change under way in the pace of upgrades," he told
clients.
Apple declined to comment.
Mr. Piecyk warned it may take more quarters and the launch of
the next model of iPhone -- likely in the fall -- to confirm the
trend. While some contend that being in the tail end of the
two-year iPhone model cycle hurts upgrades, he said the decline
this year has been "more steep than prior cycles."
Write to Thomas Gryta at thomas.gryta@wsj.com
(END) Dow Jones Newswires
April 18, 2016 15:37 ET (19:37 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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