Author(s): Peter Bryer
In early September, along with a new iteration of devices, Apple introduced its iPhone Upgrade Program — a response to growth of equipment instalment plans (EIPs) from US mobile operators (see Daily Insight: Unlocked and Loaded). The iPhone Upgrade Program allows consumers to finance smartphones over a two-year period or trade in their device after a year for an upgrade to the latest model. CCS Insight believes that many Apple users signing up for the programme will opt for the latter, tempted by the latest model rather than skipping an upgrade iteration. Other phone makers including Samsung are exploring similar leasing strategies for flagship handsets.
The sudden surge in device trade-in programmes means that many late-model, fully functional smartphones will be redistributed in some way. Second-hand iPhones often retain their value, so very saleable products are being turned in. An unlocked, refurbished iPhone 6, for example, can be found on sites like Amazon and eBay selling for close to 80 percent of its original retail price.
This is something rather new: the smartphone market could begin to look more like the automotive market, with leases and robust pre-owned sales. Millions of high-value devices as young as a year old will be collected and refurbished by operators, device makers and third parties, but it's not completely clear where these will land. Functional second-hand devices have historically filtered into emerging markets in Africa, Asia and Latin America. The second-hand market wasn't as fluid before GSM became a true global standard and before most phones covered most frequency bands and supported many languages, but now models from one continent can easily flow into another. The millions of refurbished iPhones could wind up anywhere.
In April, we noted that Foxconn was establishing an Apple-sanctioned business unit for refurbishing and selling second-hand iPhones to eager Chinese users (see Daily Insight: Foxconn's Second-Hand Business). Apple sold 192 million handsets in 2014, and some estimates suggest that Foxconn could sell a significant 20 million used iPhones per year in China.
We expect that many of these will be shipped to China for an official refurbishment process, but certainly not all will stay there. Operators in the US could use the pre-owned phones to support their subsidiaries and partners in emerging markets. AT&T, for example, may ship devices to Mexico to encourage mobile data usage in the region.
But not all collected iPhones will be shipped away, with some pristine second-hand devices staying in their original markets. Many extended warranty plans replace a lost, stolen or damaged phone with one of equal age, so insurance companies need access to a bank of refurbished handsets. There's also strong demand for late-model iPhones among prepaid subscribers Western markets, and a discount of 20 percent or more for a pre-owned model could help Apple to address this segment.
There have been concerns of cannibalization: Apple could essentially be stealing users from itself by steering them away from new iPhones, but we don't believe this will be the case. Apple is aware that Android dominates in most markets, and a certified pre-owned programme will allow the manufacturer to address a segment of consumers that might have been lost to the competing mobile platform. This would be a further boost for iOS, and should encourage more local app development.
Apple has used its financing plan to engineer several longer-term dividends for itself. We expect shorter replacement cycles for iPhones in markets in which Apple introduces the EIP, and anticipate greater iOS exposure in growth regions. The iOS user total will spread and expand.
EIPs could have a much larger effect on the handset industry than originally envisioned — an established used smartphone market will alter dynamics in the emerging and developed markets. CCS Insight's recently revised smartphone forecast outlines increased projections for the volume of pre-owned iPhones in Apple's core markets of North America and Western Europe. In North America, for example, we project that almost 9% of iPhones sold in 2019 will be second-hand units.
This is a significant development for Apple's smartphone competitors. Flagship devices from LG, Samsung and others will now be contesting for sales against sanctioned second-hand iPhones.