Apple is officially entering the market for smartphone finance with the announcement of its iPhone upgrade scheme last week. The iPhone upgrade premise is simple – pay a monthly fee ($32 USD or~$45 AUD) for a new iPhone each year which is unlocked (so you can choose your carrier) and includes Apple’s insurance service ‘Apple Care’. This comes at a time when the narrative of ending subsidies has been pitched against device makers mainly because of the high up-front cost for consumers. There are strong indications that lower upfront costs are indeed driving high-end smartphone sales.  For carriers, though, it is device makers like Apple entering into financing and ‘rapid upgrades’ that puts at risk the lock-in, contract-based business model carriers have been seeking to maintain.

Handset subsidies as a business model are as old as the history of handsets themselves. These are prevalent in most Western markets. In Australia, all major mobile carriers offer some sort of subsidy which can be up to $400 off the price of a top end smartphone, with some like Telstra offering a 1 year exchange (rapid upgrade plan) for a new phone (‘New Phone Feeling‘).  However, this latest announcement from Apple, in line with advancements toward a virtual SIM, start to paint the end-game for the mobile device value chain and the evolution of new business models.

This post explores the major strategic implications to device makers (e.g. Apple, Android etc.) and carriers of device makers moving into smartphone financing+upgrade offerings bundled with device sales. 

Device Makers

Device makers have much to gain from bundling device sales, finance and upgrades. Here are the major strategic implications.

Increased brand loyalty/reduced churn of smartphone provider

Apple experiences less ‘device churn‘ than other device makers and many people who own an Apple device are fiercely loyal. However, under the current subsidy/24 month contract models there is a re-contract moment that gives a consumer the choice to switch device. For a mobile carrier, installment and rapid upgrade plans are a way to prevent churn off the network, for device makers they are a way to stop churn from iPhone to Android. In the former your next ‘free’ smartphone might be an Android or an iPhone. Under an Apple subscription, it will be an iPhone – a new level of loyalty and elasticity.

Second-hand, emerging market opportunities

What happens to all the rapid upgrade phones? They are typically refurbished and sold in second-hand markets. As device makers take on refurbishment and resale as part of offering financing and upgrades they are likely to end up competing with new devices in mature markets. This opens the door to selling in emerging markets. Whilst the lower-cost iPhone 5C has not had success in these markets a 1 year old, refurbished second-hand high-end iPhone 6 may – market entry by stealth. It could be expected that emerging markets will have a higher portion of second-hand older devices than brand new devices (per capita) thus representing a growth in market size for Apple.

Value added services at the device not the carrier

Like Google’s Project Fi, offering subsidies and upgrades is another case of device makers moving into the carrier’s domain. Apple has been rumoured to be looking at setting up an MVNO (like Google) – this article makes a pretty interesting case for why it should. But it’s not just the possibility of being an MVNO or access provider, there are other value added services in the carrier’s wheelhouse that device makers could offer like professional installation, entertainment packages and adjacent service offerings (e.g. health, fitness).

Mobile Carriers

The implications for mobile carriers are bleak. As noted, subsidies+upgrades from device makers are yet another case of the diminishing influence carriers have over their customers.

Carriers left with nothing but access and service

Previously, Apple sold the device while the carriers bundled financing and service; now Apple is bundling financing and the device leaving the carriers nothing but service. Add to this virtual SIMs, like the Apple SIM, and Apple is exerting total dominance over carriers. Granted, this is not an overnight conclusion but the road is mapped.

Reduced customer reliance on carriers

By eliminating re-contracting at the carrier, one more contact point between customer and carrier is taken away. Customers will have to choose which carrier to access but in a virtual SIM world (carriers will have to be open to this) this will be done through software on the device. Even as part of the iPhone upgrade plan, the iPhone is unlocked allowing conscientious users to access their carriers of choice or use multiple SIM cards. The future will be much simpler for users and carriers will need to rethink the value they add at each customer contact because there will be fewer.

These changes will not happen overnight. We are still at least 12 to 24 months from the Apple SIM or standardised virtual SIM and people adopting it could take months or years after. As for financing and upgrades, most people will still buy from carriers for several years to come, and anyone already on an installment plan from their carrier will find it challenging to switch. However, the market power shift from carriers to devices continues (as it has done since the first iPhone release 8 years ago), unbundling carriers’ offerings piece by piece.