It is widely known that smartphone users are holding on to their devices longer as they upgrade to a new model less often. This lengthening of the replacement cycle is negatively impacting Apple's iPhone sales. The frequency at which smartphone users purchase new models has been slowing for many years now, but the impact has been less apparent. Sales to new users masks the declining sales to current users. If the percentage of iPhone purchasing a new phone in a year drops from 50% to 40%, sales will decline 20% Y/Y unless the 10% shortfall is offset by other sources of demand, such as first-time smartphone buyers or Android users. If sales to new iPhone users considerably outweighs the slowdown in replacement demand, it is hard to detect that change in purchase behavior. When the market becomes saturated and sales demand is dependent on current users, any slowdown in upgrades surfaces to the forefront.
The 4 major US wireless carriers report the percentage of their subscriber base that upgrades their device in that quarter, and the sum of those 4 quarters equals the annual upgrade rate. A 50% annual upgrade rate implies replacement cycle of 2 years, 25% would be 4 years and so on (1/.5, 1/.25). The upgrade rates carriers report understate the level of replacement activity as it only captures upgrades from THEIR current subscribers. Upgrades that occur at a new carrier when a subscriber switches wireless service aren't reflected in those figures. To account for those upgrades that carriers classify as gross adds, I use churn rates as a basis for an adjustment assumption. With out an adjustment, the upgrade cycle has extended from 3 years (2010) to recently (2018) longer than 4.5 years. We know that is too long, which is not a surprise since upgrade activity is not full captured. After adjusting, those rates go from 2.23 years (2010) slowing to 3.46 years in 2018.
I estimate the current replacement rate is around 3.5 years on average. Both AT&T and Verizon have a 80-85% take rate for installment plans on smartphone sales. The percentage of subscribers on installment plans has been stuck at 50% for more than years now at both carriers. If 85% of subscribers took an installment plan and upgraded every 2 years, then the percentage of subscriber base on those plans would be 85%, not 50%. That 35% represents users that were on installment plans that have since ended but have not upgraded to a new model. Doing the math, only 58% of smartphones (in use) purchased on installment are 2 years or newer, conversely 42% are older than 2 years. This equates to a 3.4 year replacement cycle which is consistent with the figure I calculated based on the method mentioned earlier. The absolute number is not as reliable or as important as the trend. The trend explains a lot and is illustrated in the charts below.
In the Fall of 2014, Apple introduced its first iPhone with a large screen display-The iPhone 6 Plus. The decline in upgrade rates quickly reversed as iPhone sales surged due to the considerable amount of pent-up demand for a large display iPhone model. After iPhone Plus mania subsided, upgrades rates resume their decline and have really collapsed in the last 2 years. When / Will we see another event like 2014? A massive upgrade cycle or "super cycle" has been expected for two years now, yet it has not materialized. However, an iPhone that is not upgraded this year, is an iPhone that might be upgraded next year. iPhones do not last forever; eventually, they will have to be replaced. As iPhone owners hold on to their devices longer, the amount of pent-up demand for future iPhones increases. So while Apple may have periods of weak iPhone revenue resulting from soft upgrades, there will be periods when upgrades rebound generating strong iPhone sales.
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