The average American upgrades her smartphone about every 22 months, according to a 2014 study by Recon Analytics. This very short upgrade cycle has been one of the key drivers behind the fast-growing smartphone market. Apple (AAPL +2.91%) is particularly vulnerable to average smartphone upgrade cycle rages given that iPhone sales now account for a whopping 69% of the tech giant's revenue.
Source: Apple.
Could the upgrade cycle for smartphones slow?
There's no sign that the upgrade cycle for smartphones is slowing yet. Apple, who accounted for 47.7% of smartphone sales in Q4 2014, according to Kantar, saw its iPhone sales jump 46% from the year-ago quarter. The monstrous jump in sales is undoubtedly in part due to a significant upgrade cycle.
Even if the average upgrade cycle rate at other manufacturers weakened in Q4 2014 -- which is a possibility since Apple snapped up market share at other manufacturers' expense -- compared to rates achieved in the year-ago quarter, Apple's large jump in iPhone sales in the U.S. probably more than made up for any potential lengthening of the cycle.
Over the long run, it's obviously possible that the average upgrade cycle for smartphones in the U.S. could increase. This trend is already happening in tablets, where subsidies and interest-free financing from carriers don't play a key role in convincing consumers to upgrade as often. Apple CEO Tim Cook said himself during the company's most recent earnings call that one of the factors constraining iPad sales growth is "that the upgrade cycle is longer." But, to be fair, cannibalization of tablet sales from the growing popularity of smartphones with larger displays is probably even more central to the slowing sales growth in tablets.
But with no substitute in sight for the smartphone, and wireless carriers as aggressive as ever in offering promotions for their customers to upgrade, the only driver that seems like a potential threat to upgrade cycles would be a deceleration in perceived incremental growth in utility. But even this trend seems slow in coming after seeing Apple convince 74.5 million people across the globe to buy a new iPhone in Q4.
One of the ways Apple attempted to differentiate its newest flagship iPhone models was with Apple Pay. Source: Apple Pay.
The two-year upgrade cycle for smartphones in the U.S. is likely to persist for years.
How do you stack up?
Some of the best insights on this trend may be gleaned from personal anecdotes. How long did you keep your last smartphone before you upgraded? Are you already planning on upgrading? What will it take for you to upgrade your current smartphone?
As long as the upgrade cycles for smartphones stay around two years, Apple's largest business segment will likely continue to be strong -- especially once you take into consideration the opportunity to attract first-time smartphone owners in developing countries. But if signs begin to surface that the smartphone upgrade cycle is beginning a decline, investors should carefully assess the implications.
