Merrill Lynch: iPhone subsidies are attractive, but come at a cost

From a note to clients by analyst Wamsi Mohan that landed on my desktop Wednesday:

Carrier incentives can change the replacement cycle for iPhones. We estimate that customers will pay $100 ($300 including Apple Care) in upfront costs including trade in benefits if they switch carriers and/or sign a 2-3 year contract with their carrier on upgrading/renewing an unlimited data plan.

The trade-in promotions suggest that the carriers want customers to upgrade their iPhones roughly every 2-3 years (max trade in benefit up to $1000) vs. much lower trade in values for older iPhones ($350-400).

The unintended consequence of a faster high end replacement dynamic creates a large secondary market of extremely new and capable used iPhones that can ultimately create pressure on primary (new) iPhone sales.

Although recent lead times indicate shipment times a bit further stretched out vs. last year, we are concerned that this could be an indication of limited supply especially given component shortages and the more recent news of China limiting energy usage in various regions.

Maintains Neutral rating and $160 price target. 

My take: Apple's trade-in program pays less than the carriers, but you avoid most of those hidden costs.

14 Comments

  1. Fred Stein said:
    Politely disagree w/ Wamsi.

    Apple sells only about 25% of the IB which Gene Munster claims is growing by 10 to 15M annually. Other analysts assert that lead times reflect strong demand rather than supply chain constraints.

    Even if some demand is pulled forward by carrier subsidies, Apple has shown consistent long-term growth across all device types and services.

    3
    September 30, 2021
    • Gregg Thurman said:
      Even if some demand is pulled forward by carrier subsidies,

      I’m not so sure there will be much pulled forward going on with the IP 13.

      The performance equation of the IP 13 is much greater than the IP 8/10 (four years old). Then there are the switchers from Android to iPhone to consider. It doesn’t take much to grow the IB by 10%-15% YoY (something I believe will happen this year and next).

      0
      October 1, 2021
  2. Daniel Epstein said:
    If Apple is getting good prices for the new iphones then the businesses most likely to suffer from the pull forward are the carriers who are jockeying for position to gain and retain the customers. If Apple was providing the subsidies or cutting prices of the new phones then one might say the cloud in the silver lining was becoming an issue. From what I have read new ASP’s are still rising a bit. I doubt the revenue from used phone sales is concerning to Apple’s bottom line performance. I think we could have several years of a tailwind where the replacement cycle gets shorter before it elongates again if the carriers are still fighting for market share. If the carriers stop giving the rewards for Iphone trade ins but somehow maintain them with Android phones then it will get a bit more interesting but I think Apple will have that covered as well.

    1
    September 30, 2021
    • Gregg Thurman said:
      From what I have read new ASP’s are still rising a bit.

      Despite the IP 13 being $50 less expensive than the IP 12.

      0
      October 1, 2021
  3. Jerry Doyle said:
    “….The unintended consequence of a faster high end replacement dynamic creates a large secondary market of extremely new and capable used iPhones that can ultimately create pressure on primary (new) iPhone sales.”

    The above is supposed to be a potential problem? Quite the opposite! The unintended consequence of a faster high end replacement dynamic creates a ready secondary market of extremely new and capable used iPhones for Android users in third world and developing countries. There are some individual iPhone users in the USA who purchase used iPhones. I know them. Even though most all of them easily could afford to purchase a new iPhone, they go for the used ones for the competitive cost factor. These types will continue to purchase used phones and the phones the carriers cannot unload in the states will find their way to other countries.

    Wamsi Mohan is one of my better WS analyst, but his naiveté in understanding how his assertion is a positive instead of a negative doesn’t surprise me in the least. Brother Joseph B said it best as to Wamsi Mohan not understanding Apple which means also, he doesn’t know Apple. I continue to be blown away how folk on this blog know more about Apple than WS analysts ever could hope to learn.

    Apple is pleased to flood the globe with iPhones on the secondary market for a vast unsaturated universe of potential new Android converted iOS users. The ludicrous of Wamsi Mohan assertion! So, is Apple supposed to be alarmed that more iPhones will be sold going forward on the carriers’ subsidy promotions? I can just hear Apple representatives now calling up the carriers and telling them to stop subsiding iPhone. Talk about ludicrousness. WS analysts never fail to underwhelm me.

    2
    September 30, 2021
    • Jerry Doyle said:
      Excuse the second post… I guess spell check changed the wording on me. Anyway, here is what should have been stated:

      Apple is pleased to flood the globe with iPhones on the secondary market for a vast unsaturated universe of potential new Android converted iOS users. The ludicrousness of Wamsi Mohan assertion! So, is Apple supposed to be alarmed that more iPhones will be sold going forward on the carriers’ subsidy promotions? I can just hear Apple representatives now calling up the carriers and telling them to stop subsidizing iPhones. Talk about ludicrousness. WS analysts never fail to underwhelm me.

      1
      September 30, 2021
      • Fred Stein said:
        Yes. While I quote Gene’s estimate of 10M to 15M new-to-iPhone. I suspect it is higher due emerging markets, and children getting their first iPhone in developed markets. 140M children are born each year. Taking Apple’s market share as a rough proxy, that’s 20M children getting their first iPhone (when they reach teen years) added to the switchers.

        1
        October 1, 2021
  4. John Konopka said:
    Where do the carriers sell iPhones they receive as trade-ins?

    0
    September 30, 2021
  5. bas flik said:
    carriers sell trade- ins to traders who sell them in the markets. our supplier of refubished iphones is growing 30% annualy. most of the iphones they sell are imported from USA originating from trade-in programs of Apple stores. This will be a big market and gives apple a competitive edge because the actual purchase price will decrease by trade-in value. Like buying a Mercedes. Samsung lacks this market. in the end ecosystem will grow at a cost of android. Also android is not really profitable market. Only price competition. they destroy themselves.

    4
    September 30, 2021
    • Bart Yee said:
      @bas. thanks for that info. My guess would have been similar. I’m presuming the best condition iPhone trade ins will get lightly refurbished, repackaged and resold at Apple online or telecom online. Other option is they get sold to secondary market sellers. Lesser condition or value iPhones can get traded/sent out to secondary or tertiary markets domestically or internationally where cost / price sensitivity is high. It is likely that these used or refurbished iPhones are not counted as Apple revenue, but the secondary benefit is it drives installed base (the traded in iPhone is replaced by a new iPhone and the resold is a new user or replacement for a current user so it is always less than 1:1) and App Store purchases. All other lesser condition / value iPhones are hand me downs, stuck in a drawer or hopefully get Apple recycled back to parts and materials.

      What’s fun to think out is a used iPhone already has produced a nice 30% margin at first sale, plus additional 60+% margin in App use, iCloud services and AppleCare. After resale, the continued reliable life and App Store purchases of a repurposed iPhone adds another 60%+ services margin for Apple with literally no cost to Apple except for updating iOS software. Plus new users will aspire to new or late model iPhones eventually.

      iPhone, the revenue stream that keeps on giving.

      0
      October 1, 2021

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