What Apple's Really Getting Out of iPhone Upgrade

When Tim Cook took the helm a few years back, Apple AAPL investors had mixed feelings about the future of the company. After all, it's hard to live up to the image Steve Jobs built up. I read an amusing CNet article a few months back that quoted some market research data showing how engineers and marketers viewed Apple's CEO.

The two groups apparently never agree on things (I agree, I've seen the engineers' disdain for marketers myself). But this time around, the marketers seem to have backed the right guy.

Cook has come in and zeroed in on the company's flagship iPhone device and he doesn't seem to have made a single mistake thus far. Which is why the upgrade plan (or rather, Apple's limited information on it) has had me scratching my head.

One thing is clear: this is not a simple upgrade plan, there's something deeper underground.

On the Face of It

Apple announced an installment plan that wouldn't lock consumers to specific carriers. More importantly, consumes would effectively be able to use an iPhone for a year at half the cost as long as they surrendered the phone at the end of the year and opted for another iPhone at the time. Apple Care+, which costs $129, has been compulsorily added to the installment value (although chances are you won't damage the device within a year). You also need to pay $99 for the privilege of upgrading to the next iPhone the following year.

Carriers Affected

Carriers had already done away with the subsidies of yesteryears that ate away their profits and made infrastructure investments difficult (all for the sake of locking in customers to sell them data for a couple of years). This is still important mind you, so they recently made adjustments so the customer can pay for the device over the contract period.

Apple's always been a hard task master, but it doesn't bother others unless there's an opportunity to further milk the cow.

T-Mobile, Sprint S , Verizon VZ and AT&T T need people to buy from them, so they are falling over each other trying to attract buyers. They've also wasted little time adjusting their plans to limit differences as 9to5 Mac has tabulated rather nicely.

So Why Is Apple Doing This?

Turning in the iPhone at the end of the year means you are paying roughly half the price plus $99, which are together setting you up for a fresh 2-year program. And Apple gets ownership of a 1-year-old iPhone for which it has recovered all of the cost.

It would be really foolish to flood the market with these devices and cannibalize its own sales. So what does Apple plan to do with them?

Of course , this is entirely conjecture on my part . But take a look at this data from Strategy Analytics, where it's obvious that building position in two international markets (China and India) is absolutely essential for any smartphone company in the next few years.

The two together account for most of the world's population (OK, FX and per capita income are problems, so technically, most of them can't buy a premium device manufactured in the U.S.).

But Strategy Analytics estimates that China will grow 13% and India will grow 43% this year. India in particular will continue to grow double-digits for the next few years to topple the U.S. as the second largest smartphone market by 2017. Other markets will grow single-digits, or not at all. So it can't make sense to ignore the opportunity.

Also, Chinese demand for the iPhone is still extremely strong (I hear somebody tried selling a vital organ to get one) while it's not as intense in India yet. So iPhone sales in China continue to rise, beating all odds and silencing naysayers.

Apple has already started laying the net in India. It started off with ads that focused on its premium quality and roped in a chunk of the affluent, the class-conscious, the show-offs and the early technology adopters. But this is low-hanging fruit and Apple needs to do more to drive penetration, particularly in a market where local players, Asian players and Google's GOOGL Android One are present and with some players pretty well-entrenched.

So Apple has a plan for the downstarts too. Its current ads and promotional programs are skillful, positioning the iPhone as elite while at the same time offering it for free with regular-use items like a box of cookies (based on a lucky draw of course). Apple has considerable flexibility with these deals if required because the upgrade program brings into its possession a large number of devices on which cost has already been recovered.

Quick Picks

Apple has a Zacks Rank #3 (Hold) at the moment, but if you're interested in other technology picks, you can may be go for Google, Fitbit FIT or LendingClub LC , all of which have a Zacks Rank #2 (Buy).

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APPLE INC (AAPL): Free Stock Analysis Report

AT&T INC (T): Free Stock Analysis Report

SPRINT CORP (S): Free Stock Analysis Report

VERIZON COMM (VZ): Free Stock Analysis Report

FITBIT INC (FIT): Free Stock Analysis Report

LENDINGCLUB CP (LC): Free Stock Analysis Report

GOOGLE INC-CL A (GOOGL): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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