Financial Alchemist: Apple’s U.S. iPhone replacement rate slows to once every 3.46 years

“However, an iPhone that is not upgraded this year, is an iPhone that might be upgraded next year.”

From “Visualizing Longer Smartphone Replacement Cycles” by friend-of-the-blog Turley Muller, who does the math two ways:

The frequency at which smartphone users purchase new models has been slowing for many years now, but the impact has been less apparent. Sales to new users masks the declining sales to current users… When the market becomes saturated and sales demand is dependent on current users, any slowdown in upgrades surfaces to the forefront.

The 4 major US wireless carriers report the percentage of their subscriber base that upgrades their device in that quarter, and the sum of those 4 quarters equals the annual upgrade rate. A 50% annual upgrade rate implies replacement cycle of 2 years, 25% would be 4 years and so on (1/.5, 1/.25)… To account for those upgrades that carriers classify as gross adds, I use churn rates as a basis for an adjustment assumption. With out an adjustment, the upgrade cycle has extended from 3 years (2010) to recently (2018) longer than 4.5 years. We know that is too long, which is not a surprise since upgrade activity is not full captured. After adjusting, those rates go from 2.23 years (2010) slowing to 3.46 years in 2018. [A second method, omitted here, yields roughly the same result.]

iphone replacement rate

Click to enlarge.

In the Fall of 2014, Apple introduced its first iPhone with a large screen display-The iPhone 6 Plus. The decline in upgrade rates quickly reversed as iPhone sales surged due to the considerable amount of pent-up demand for a large display iPhone model. After iPhone Plus mania subsided, upgrades rates resume their decline and have really collapsed in the last 2 years.

When / Will we see another event like 2014? A massive upgrade cycle or “super cycle” has been expected for two years now, yet it has not materialized. However, an iPhone that is not upgraded this year, is an iPhone that might be upgraded next year. iPhones do not last forever; eventually, they will have to be replaced. As iPhone owners hold on to their devices longer, the amount of pent-up demand for future iPhones increases. So while Apple may have periods of weak iPhone revenue resulting from soft upgrades, there will be periods when upgrades rebound generating strong iPhone sales. [emphasis mine]

iphone replacement rate

My take: Muller is a long-time participant in my quarterly Apple Earnings Smackdowns, where his estimates regularly beat the Wall Street professionals’. Last quarter he came in first in the all-categories ranking. His Financial Alchemist blogspot is on my blog roll.

7 Comments

  1. Robert Paul Leitao said:

    The number of iPhones in use worldwide continues to rise as the sales of pre-owned iPhones continue to rise. Although the sales of pre-owned iPhones do not flow through Apple’s books, it increases the market for constituent services.

    The sales of pre-owned iPhones create their own “currency” to support the costs of innovation and product development. For example, I trade-in my iPhone each year under the Apple annual upgrade program. The iPhone I trade-in remains in the market for a buyer. In turn, the demand for pre-owned iPhones supports Apple’s ability to engage in the program.

    Although Apple significantly raised the iPhone’s ASP with the release of the original iPhone X, Apple’s gross margin as a percentage of revenue did not increase. The higher prices supported Apple’s ability to innovate and bring advancements to market. High demand for pre-owned iPhones provides support for the buyers of new iPhones through high resale values and high trade-in values for pre-owned devices.

    Apple’s management has correctly decided to expand the company’s services offerings and the company will debut new content services this year. The number of iPhone users worldwide continues to rise even as the number of new iPhones sold each year remains cyclical.

    Although Apple’s highly popular battery replacement offer last year is obviously impacting the pace of new iPhones sold this year, the addressable market for Apple’s services and 3rd-party developers continues to rise. This is why, in-part, Services revenue will rise by double-digit rates this year even if in FY2019 new iPhone sales fall below FY2018 levels.

    Apple doesn’t “sell” devices. Apple creates customer relationships and these relationships create demand for both new and pre-owned devices. Because new iPhone sales are cyclical, it’s best to gauge growth over multi-year periods rather than by quarter or fiscal year. At this time, Services revenue is the best proxy for gauging growth in the global iPhone market on an annual basis.

    3
    February 24, 2019
    • Gregg Thurman said:

      Only sales of new product finances R&D. Trade-ins, be they cars or phones, are nothing more than a purchase finance tool.

      Just like the automobile industry, pre-owned product expands installed base, and in the case of the automobile industry increases dealership revenue through SERVICES such as repairs and after sale accessories.

      Apple is taking a page out of the automotive playbook in that it doesn’t manufacture disposables, rather Apple manufactures extended life products that Apple can monetize after the initial sale.

      This strategy is anathema to Android manufacturers. Android gross margins demand high volume, hence disposable, sales.

      Over time the consumer (new users/switchers) will migrate to longer life, high quality products. Just look what happened to the US auto industry (low quality) market share after the consumer was exposed to Japanese high quality in the ‘60s and ‘70s.

      0
      February 25, 2019

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