THE WAITING GAME

Apple’s iPhone upgrade program is off to a slow start, but the real test is in September

During its iPhone 6S event in September last year, Apple introduced the iPhone Upgrade Program, which lets customers pay off a new iPhone in installments, and upgrade their phones once a year. The offering could create a nice, steady revenue stream and lock customers into iPhones for as long as there are iPhones. How do the early results look? Not great. But the real test begins this September when a slew of customer phone plans expire.

In Apple’s fourth quarter earnings call Wednesday (Jan. 26), CEO Tim Cook said he was “optimistic” about the upgrade program, but tried to temper expectations. “In terms of the upgrade program itself, I think over time it will be meaningful as customers get into a different pattern.”

Piper Jaffray analyst Gene Munster estimated last week in an note to investors that the program accounted for 250,000 iPhone 6S sales in Apple Stores over the last three months, or about 3-5% of 6S sales in its retail locations. Munster, however, said the number will likely increase as customers get out of their current two-year plans and Apple pushes the service more.

Apple hasn’t provided any numbers, but Munster based his estimates on a disclosure from Citizens Bank, which provides financing for the program, that it added $220 million in loans to its balance sheet related to the offering. (The program, which is only available in Apple Stores, starts at $32 a month or $36 per month, depending on the size of the phone.)

But there’s a big opportunity for upgrades in general, if not the program specifically. Cook said during the earnings call that only 40% of iPhone users have an iPhone 6 or 6S, meaning 60% of iPhone users are still on old devices. Many of those holdouts are likely tied to increasingly antiquated two-year contracts: Between September and December 2014, Apple sold almost 75 million iPhones when such contracts were standard. That means a hefty number of iPhone users will come onto the market this year right around the time the next iteration of the iPhone should be released.

A positive sign is that there appears to be decent awareness of and interest in the upgrade program, according to a recent survey from Credit Suisse.

Credit Suisse said that, assuming about 30% of iPhone users join, the upgrade program will add about 50 million iPhone sales by 2017.

Although developing countries like India and China continue to buy iPhones at a fast clip, relying on new customers and markets for growth can’t last forever. The upgrade program is a “smart way to sell more units without having to expand the customer base,” David Rogers, a professor at Columbia’s business school, told Quartz.

home our picks popular latest obsessions search