Where were you when the first iPhone was sold in 2007? I distinctly remember working for Phones4U – a third-party phone retailer in the UK – and the iPhone launch completely decimated the business, because suddenly Phones4U wasn’t a reseller of the most popular phone on the market.
The same existential threat applies to all carriers except AT&T and O2, which had exclusive launch rights to the iPhone in the US and UK respectively.
Fast-forward 19 years, and Apple has repeatedly proven that the popularity of the iPhone gives it significant power over its carrier partners – customers are no longer loyal to the carrier that provides the mobile service, but to the brand behind their favorite phone.
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Apple’s newest commercial venture, the Apple Upgrade Program – which was announced earlier this year and at the time of writing is still only available in the US – is the latest dagger in the heart of large MNOs (Mobile Network Operators).
But despite being a fantastic deal for customers and Apple itself (and make no mistake: I believe it’s not a positive move), Apple’s upgrade program could still prove to be a double-edged sword for the mobile industry as a whole. Let me explain.
Carriers had ALL power…
To understand what Apple’s upgrade program is, you first need to understand how the industry worked before the original iPhone. To say that Apple irrevocably changed the carrier business model on many occasions may seem like hyperbole, but it is difficult to overestimate the lasting effect of the company.
Before the original iPhone, carriers were integral to the success of a phone. Carriers controlled which phones were sold in stores, which phones received greater marketing push and which were “certified” to work with that carrier.
This means that all phone manufacturers will have to focus more on accommodating carrier requirements — including shipping customized devices with different preloaded apps and even carrier-specific branding — than meeting the needs of their customers.
In many ways, the carriers were the customer rather than the end user themselves, and they proved even more integral because each carrier also controlled when software updates were released to its phones. I distinctly remember how customers would blame the phone manufacturer for software-related defects rather than the carrier, even though the software update was delayed by the carrier’s own internal testing.
The power of the carriers will inevitably be replaced by another model, but the iPhone has a marked effect on the power exerted by the carriers in more ways than one.
… until Apple launched the original iPhone
If you’ve seen the BlackBerry movie, you’ll remember the line used to describe the original iPhone before it went on sale: it had the “highest interest of any consumer electronic item in history”. To go further, its original $499/£269 price also made it the most expensive phone in history at the time.
But contrary to industry standards at the time, the extraordinary consumer interest in the original iPhone meant that carriers were forced to stock it, rather than Apple having to entice them to sell it. This complete reversal of established norms also meant that Apple was able to squeeze out many of the key controls that the carriers had, and the effect was powerful.
The iPhone has had a marked effect on the power of carriers in more ways than one.
Let me be Gondhia
Let’s consider each of the previous requests that carriers make from a phone manufacturer. Branding on the phone itself or in the software? Go for the iPhone. Preloaded carrier apps and other bloatware? Go for the iPhone. A software update schedule controlled by carriers? Apple releases updates for all phones at the same time worldwide. Custom models? Carriers should be thankful they stock the iPhone at all.
However, Apple’s unique position went even further. Phone manufacturers used to have to discount phones and offer incentives, but for many years Apple didn’t. Granted, we’re now in an era where Apple competes through trade-in promotions and works closely with its carrier partners, but it was the last major phone maker to embrace promotional pricing of any kind.
It’s not just Apple that has benefited from these changes; as Apple established new ground rules, companies like Samsung, Google and LG all benefited from a different playbook than in the pre-smartphone era.
Now, with the Apple Upgrade Program, Apple is once again in great control of the customer journey. For many, this is a great program, but for other stakeholders, it is definitely not. Here is why.
The Apple upgrade program is great for consumers
The Apple Upgrade Program is a leasing program provided by Apple, with funding from Klarna. It allows you to lease a new iPhone, Mac, iPad or Apple Watch and pay monthly over a fixed lease period (between 12 months and 36 months). At the end of the lease, you can choose to return the item to Apple for free or buy it out for the remaining value; the latter is a particularly attractive offer for customers.
Most leasing programs have you spending more money over the course of the lease compared to buying an item outright. This arbitrage is how the financing lender makes their money, but with the Apple Upgrade Program you will never pay more in total than the true purchase value.
This is crucial: Apple effectively offers 0% financing across its range of products, and while it likely pays Klarna directly to provide these services, there is no additional cost passed on to the customer. Essentially, you can still buy any Apple item you plan to, but you now have a more flexible way to pay for it, with no credit card or specific credit limit required.
… and also great for Apple
The current state of RAMageddon – aka the high cost of all technology due to the lack of RAM modules – means that it was inevitable that Apple had to raise its product prices, which it did with a considerable margin in June and September this year.
Although Apple customers are traditionally less price sensitive than Android customers, rising prices during a global cost of living crisis would have inevitably affected its financial statements and therefore its stock price.
The Apple Upgrade Program changes this reality in a big way: at least in the United States, it is now much easier for customers to buy Apple products (and more of them) than they used to be able to, and Apple itself gets much more valuable numbers to present to its shareholders: the number of customers on subscriptions; the dollar value of those sold; and the number of customers.
More than that, the upgrade program offers Apple predictable revenue numbers for quarters and years into the future, and allows it to launch more products over the year without worrying so much about established launch cycles and windows.
It’s also making all of its new products much more accessible to the masses, which is especially prudent given the now-confirmed $1,999 / £1,999 / AU$3,499 starting price of the iPhone Duo, which starts shipping next week.
However, the Apple upgrade program is bad for carriers…
For all its positives, there are two areas where Apple’s upgrade program could have a negative effect – and both stem from its potential impact on careers.
Like the now-defunct iPhone Upgrade Program before it, an iPhone purchased through Apple’s Upgrade Program is apparently unlocked for use on any network. It still requires activation with one of the Big Three carriers — Verizon, T-Mobile US or AT&T — at the point of sale, but once you’ve completed that activation, you can switch to another carrier of your choice.
This undoubtedly reduces the need to be locked into a long-term multi-year contract with your carrier and, crucially, removes a key source of revenue from locked devices: roaming fees. Together, they affect the revenue of the carriers, which inevitably leads to different effects for the consumer.
The Apple Upgrade Program is a deal that’s too good not to take advantage of.
Let me be Gondhia
First, customers will inevitably pay more for their service plans, whether through higher plan fees, higher add-on fees, or even increased out-of-bundle fees.
Second, the above will lead to an even more booming MVNO (Mobile Virtual Network Operator) market, but as we saw with Mint Mobile, these MVNOs will also inevitably be acquired by the aforementioned major carriers they rely on.
The biggest impact will be felt in the network technology and retail footprint. Verizon, T-Mobile US, and AT&T are publicly traded and have a fiduciary responsibility to their shareholders. They may pay even more for future spectrum owners, but the adoption and rollout of future technologies could be much slower if Apple’s upgrade program takes off as Apple clearly hopes. This is not just hyperbole; we have already seen this happen with the 5G rollout and the LTE rollout before.
The impact will be even more acute for those who like regular carrier business. T-Mobile has already made some services fully digital, and, like other industries, the phone business seems to be undergoing a managed decline. Continued pressure on carriers’ revenue sources will simply accelerate this shift, with vulnerable customers most likely to feel the effects.
So, yes, the Apple upgrade program is a fantastic deal for most people involved, but I’m concerned about the impact it will have on carrier operations, and specifically how those operations may affect consumers in the long run.
All told, my next Apple purchase will almost certainly be through the Apple Upgrade Program – it’s a deal too good not to take advantage of, especially if you’re buying one of Apple’s higher spec models.
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