The end of phone subsidies from all four major wireless carriers -- AT&T (NYSE:T). Verizon (NYSE:VZ), T-Mobile (NASDAQ:TMUS), and Sprint -- appears to be causing consumers to wait longer before replacing their Apple (NASDAQ:AAPL) iPhones.
Over the past three years, among buyers of a new iPhone in the United States who own an old iPhone, the age of the phone being retired has steadily increased, according to recent research from Consumer Intelligence Research Partners (CIRP). Going back to the June 2013 quarter, 66% of iPhones in use were either under 1 year old or from 1-2 years old, according to CIRP. By the March 2016 quarter, 51% of old iPhones were either under 1 year old or from 1-2 years old.
The research firm also found that phones over 3 years old only accounted for 5% of all iPhones being used as of the June 2013 quarter. As of the March 2016 quarter that number had grown to 12%.
"We can translate these retiring iPhone age distributions into an estimate of the change in age of previous iPhones," said CIRP partner Mike Levin in a press release [opens in PDF]. "Over the past eleven quarters, in some quarters the average age of a previous iPhone increased by as much as four weeks. It did decline in a few quarters, from mid-2014 to mid-2015, and again in the most recent March 2016 quarter. Overall, over the past almost three years the average age of a new iPhone buyer's previous iPhone has increased by approximately three months."
Why are people holding onto their iPhones longer?
After iPhone was introduced in 2007, wireless companies in the United States eventually settled into a two-year upgrade cycle. Customers paid a reduced price for their new phone upfront (usually $199 for a base model iPhone) and were then locked into a two-year contract. In that pricing model, some people would hold onto their phone more than two years while others would pay the penalty to upgrade early. Others updated right at two years.
That two-year subsidy model began to change when T-Mobile dropped it in 2013 and Sprint, then Verizon, and finally AT&T followed suit. By the release of iPhone 6s in 2015 only AT&T was offering subsidized phones to most customers and even that carrier was not pushing that model.
CIRP partner Josh Lowitz believes that's one of two reasons why people have been holding onto their iPhones longer.
"The rate of change in iPhone features has slowed. In addition, phone financing plans now encourage iPhone owners to hold on to their current phone," he said in the press release. "Only a few years ago, mobile carrier phone purchase subsidies encouraged customers to upgrade a phone on a steady two-year cycle with no monthly discount for holding a new phone beyond two years. Today, phone financing plans effectively reward customers who have paid for their phone in full."
Lowitz also noted that the idea of holding your phone longer for financial reasons (or because the new phones don't excite you enough to change) has outweighed the impact of plans like Sprint's iPhone for Life, which encourages people to upgrade every year.
Why is this bad for Apple?
Apple made around 65% of its revenue from iPhone sales in the second quarter of 2016. If people wait longer to upgrade their phones, that could significantly impact the company's bottom line because of who is buying iPhones in the U.S., according to Levin.
"At least in the U.S., Apple increasingly sells new iPhones to current iPhone owners," he said in the press release. "This means the current installed base is the most important future customer market. In the absence of compelling new features, which will encourage early upgrade from iPhone 6 models, these factors will influence and probably limit U.S. iPhone sales in the coming quarters, relative to past quarters."
The CIRP results, which are based on findings from its quarterly surveys of 2,767 Apple customers that purchased an iPhone, iPad, or Mac in the U.S. in the September 2012 through March 2016 quarters, show a new reality for Apple. It's possible the company could push these numbers up if the next iPhone has some sort of must-have feature, but the financing models pushed by the wireless carriers make it more likely people will hold onto their phones two years or more. That's bad news for Apple as it means fewer phones sold, which could be a serious drag on earnings.
Daniel Kline owns shares of Apple. He upgrades his iPhone every year. The Motley Fool owns shares of and recommends Apple and Verizon Communications. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.