According to new Morgan Stanley research, customers are still talking about buying a new smartphone every two years.
Smartphones aren’t headed for a three-year cycle, says Morgan Stanley’s chief Apple watcher, contradicting last month’s supply chain rumors, today’s Wall Street Journal, and conventional wisdom on the Street.
“We’re actually quite bullish,” says Katy Huberty in a video released to clients Tuesday.
According to a new AlphaWise Survey of smartphone owners in seven countries, the market may in fact be setting itself up for what Huberty calls a “potential supercycle.”
Most analysts’ estimates for Apple and Samsung, she says, imply that customers are sticking with their current phones longer and longer, stretching a replacement cycle that used to be 24 months to nearly 36 months.
But that’s not what customers are saying. The replacement cycle has not changed materially in the seven smartphone markets surveyed. If anything, according to AlphaWise, customers are even more eager to buy new phones this year than they were last.
In the U.S., for example, average intended smartphone life—months since last purchase plus months until next purchase—has shrunk to 24 months from 29.5 months in 2015. In China it’s up a bit, but only to 22 months. Average replacement cycle in the seven largest markets is now 23.1 months, down from 24.6 months in 2016.
“We think that creates a coiled spring, where we could potentially see an acceleration in growth,” Huberty tells her clients.
Supporting the coiled spring theory is the chart below, offered by Morgan Stanley telecom specialist Simon Flannery. It shows what could be a lot of pent-up iPhone demand. For example, more than a third of the iPhones owned by AT&T customers are already at least three years old. At Verizon, nearly 44% are iPhone 5S or older.
Click to enlarge.
One last chart, courtesy of Huberty. It shows Apple’s share price bottoming out in April 2013, six quarters before the launch of the blockbuster iPhone 6.
If the 2017 iPhone is indeed the the one to wait for—as the latest wave of reports has it—then by Huberty’s reckoning now might be the time to bulk up on Apple.
Based on an estimated 500M iPhones in current service, an upgrade cycle every 36 months (conservative) produces approx. $150M annual iPhone sales just among existing customers.
This number plus new iPhone sales from Android switchers and smartphone growth in emerging markets and one can paint a far more optimistic picture of 2016 – 2017. It’s estimated that 6B people will own a smartphone by year 2020 — that’s approx. 1.7B new smartphone customers!
Edit: The additional # of new smartphone owners *worldwide* will increase approx. 2.7B by year 2020, not the 1.7B mentioned above, depending on whose world figures you buy.
The thing missing from the chart and Huberty’s analysis are the technological improvements in any given iPhone upgrade cycle. This is critical information. Because depending on what the new technological advance is with each upgrade, it has tremendous influence on adoption.
We all know the larger screen iPhone 6 and 6-plus made a huge impact. Prior to that, adding 4G, more carriers in more locations – particularly China – and of course the app store, all improved iPhone sales dramatically.
After 9 years, a lot of new features and hardware improvements have happened to the iPhone and its ecosystem, with growing app development and how people use it. To make grandiose statements about upgrade cycles without knowing what the NEXT technological advancement will be, is an incomplete questionable conclusion, in my opinion.
Rumored OLED displays for example, can help make the iPhone much less susceptible to breaking when dropped, and making it lighter and more energy efficient should increase battery life. All very good reasons to want to upgrade.
The question becomes, which technology, and when it comes out, makes all the difference. Not too mention Apple’s new trade-in program which essentially turns the iPhone into a leased product with a very set upgrade schedule.
I can’t agree, David. Apple is, in my opinion, solidly on a 2 year upgrade cycle. I think that 2 year cycle was reinforced from the get-go by AT&T, etcetera, and Apple is riding it, bringing out a new form factor just in time to match the increased demand – which also reinforces that cycle 2 years hence.
The “bad” part of a 2 year cycle is that it plays out towards the end of the 2 years – like right now. The good part is that Apple can squeeze the maximum juice out of each major form factor change.
The main thing Apple has to be careful of, as I’ve said repeatedly, is making the mistake they did with the 5 series and creating a new form factor that isn’t easy to goose production on. Oh, and of course macro issues (like a sinking economy or an over-strong dollar) that hit everyone.
Well, time will tell. There are however, three things that I think are working to change the “two-year cycle”.
First, there is Apple’s relatively new trade-in program that allows iPhone users to upgrade their iPhones annually, and is essentially a ‘lease’ plan. I don’t believe most iPhone users are even aware of it. It has huge potential to become popular in my opinion – as one’s monthly charges remain about the same while you can get the latest iPhone each year.
Second, carriers are eliminating their two-year contracts. I find this somewhat specious, because the carriers do not reduce a user’s monthly charges when they keep their old iPhones after the contract expires. I mean, arguably you’d think after you’ve ‘paid it off’, there would be a reduction? But the big carriers describe it differently. Customers are sick of the manipulation and being over-priced. Excuse me, I digress.
And third, iPhones are made so well now that they really don’t need to be upgraded as often because they are powerful enough to run everything good enough.
My point is, more and more people will be upgrading their iPhones either every year, every two years, or every three or more years. The two-year-cycle is becoming less of a thing going forward.
I’m with Joseph Bland on this one David.
As tech people, we think people pay attention to the iPhone changes. They don’t.
More importantly, if you’re upgrading from an iPhone 6 to an iPhone 7, the tech jump is usually pretty significant no matter how much that change is derided by the critics.
“As tech people, we think people pay attention to the iPhone changes. They don’t.”
I think the “waiting for a bigger iPhone” phenomenon proves that theory wrong.
Only one comment:
http://ped30.com/2016/04/29/apple-iphone-yo2y-compare/
So far my wife and I have been on a 2-3 year cycle but for me, an important technological change, like wireless charging would get me to upgrade sooner given that I have a new truck that has that feature and it would be great to use it.
If Apple dumped the analog audio port that might have an affect on this cycle for some given the amount of yelling there’s been about this. I use Bose QC25 headphones but would have no problem either getting an adapter or even upgrading my phones to the newer Bose QC35 which are wireless.
I don’t care about having the latest stuff, just tools that work well and have the features I want to use.
My wife and I were on a 2 year cycle but this year my wife said she was going to skip the 6S (I’m on the alternate year). But when it came down to it, she upgraded.
Honestly, this 3 year upgrade story is so obviously an attempt to get people to put off buying this year so that the Apple bashers can then say Apple is doomed. And it just flat won’t work. Apple is now selling a one year plan. People will just buy that and upgrade every year if they’re worried about the tech leaving them behind on an off-year.
I just don’t think we’ve gotten close to the “good enough” stage yet, so I see plenty of growth ahead for Apple specifically and for smart phones in general. But even when we do get to “good enough”, if people own an Apple, they’ll eventually buy another Apple. It’s ever been thus.
I call BS on the two year “death and transfiguration” drama of Apple’s stock price.
First: Dec ’07 to Dec ’09; Then: Aug ’12 to Aug ’14.