Apple Inc. (ticker: AAPL) investors are eagerly anticipating the launch of the 10th anniversary iPhone 8 due out later this year. But while the iPhone 8 sales cycle is expected to be a landmark event for Apple, investors should keep an eye on a potential troubling shift in the behavior of the Apple customer base.
In the company’s first-quarter earnings call, AT&T (T) CFO John Stephens said AT&T is witnessing what he sees as a permanent shift in smartphone upgrade behavior. When asked about the company’s uncertain outlook for smartphone sales, Stephens says several factors appear to have changed consumers’ attitudes toward upgrades. These factors include an end to carrier subsidies, an increase in device recycling and a shift from hardware to software upgrades.
“I clearly believe it is a permanent change from where we were in the subsidy model, and I believe that the upgrade rates will be down on a permanent basis,” Stephens says.
In the past, carriers such as AT&T, Verizon Communications (VZ), T-Mobile (TMUS) and Sprint Corp. (S) have subsidized iPhone prices so that customers pay only $199 for devices that would otherwise cost $650 or more. However, earlier this year, Verizon became the last of the major carriers to eliminate the iPhone subsidy.
Stephens says customers are now “understanding the costs of a phone differently,” and it’s impacting their behavior. He also says AT&T is seeing more customers recycling phones by passing used phones on to others. In addition, Stephens says an increasing number of smartphone upgrades are software upgrades that can be downloaded and installed without buying a new device.
As a result of these trends, AT&T sold 1 million fewer iPhones in the first quarter than it did a year ago.
“While a new iconic iPhone should help drive iPhone sales for Apple, if AT&T’s expectations for upgrade trends [are] correct, Apple and the industry may find growth more challenging,” Wells Fargo analyst Maynard Um says. “Lower consumer appetite may also adversely impact pricing and margins. Whether this is a cyclical smartphone blip or the start of a secular downtrend bears watching.”
With Apple stock already up 24 percent in 2017 and expectations for the iPhone 8 sky-high, Wells Fargo maintains…
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