Apple’s iPhone Upgrade Program has potential for massive disruption

Rather than a product announcement, three words, briefly mentioned toward the end of Apple’s event last week could change the wireless industry as we know it.
The words? “Apple Upgrade Program.”
That may seem crazy, considering all the shiny new gadgets that were on display, but an iPhone upgrade program from Apple– the manufacturer itself is a huge game changer — one that could help cut costs for customers, save money and boost loyalty for Apple,  and eventually force the wireless carriers to rethink how they’re doing business.

How Apple will beat current carrier realities

Mobile device consumers are rarely confronted with the total cost of their smartphones. iOS devices, and the iPhone in particular, are toys that come with a pretty hefty price tag. Right now a 64GB iPhone 6 costs $650 unlocked via the retail site. Add Apple Care Plus and a two-year protection plan and you’re looking at just under $800 for a mobile device that’s already considered old, having been released a year ago.  The technologically comparable Nexus 5 retails for $375. Traditionally, carriers hide this price tag. You, the consumer, give them $200 to $400 for a phone up front — with the remaining amount being recouped in instalments attached to the service contract.
Apple’s Upgrade Program offers a different path by allowing consumers to buy the phone directly from Apple with instalment pricing. The iPhone 6S can access “23 LTE bands” which is tech-speak for the fact that it can talk to nearly any 4G LTE network available today. That, in turn, means consumers no longer need to buy the Verizon (CDMA) or AT&T (GSM) version of the phone. Instead they get their phone from Apple and take it to whichever carrier they want. Without a contract, wireless consumers can switch from one carrier to another as they see fit, carrying their phone with them the entire time.
The plan is simple but the potential for disruption is absolutely huge. Let’s look at the business implications.
iPhone Pricing

Killing the long-term contract model

During the last several years, long-term contract plans have been dying off in favor of devices that allow you to prepay the service fees through a no frills wireless carrier. While large players like Verizon and AT&T continue to battle for the top spot in post-paid consumer wireless contracts, they’re also chasing the little guy. Let’s not forget that low cost carriers like Cricket, Boost Mobile, Virgin and Metro PCS have been gobbled up in the last few years by AT&T, Sprint, and T-Mobile (respectively), as these 3 of the big 4 carriers have sought to grow their wireless subscriber numbers.
Apple’s upgrade program allows users that would have normally renewed a contract with the big carriers to go off-contract, and seek the best deal they can find with their iPhone. Without being able to lock consumers into contracts for the hottest new phone, carriers will need to compete with one another on the speed and amount of wireless data offered (Imagine that). As we’ve seen in so many industries, that sort of competition on commodity services could very well lead the carriers toward a race to the bottom.

International roaming fees? No thanks

As discussed, Apple’s Upgrade Plan for the iPhone 6S means wireless customers have phones that are truly unlocked. Not only can they choose a new carrier month-after-month in the U.S., they can also take their phone abroad — and, rather than pay for a costly international mobile data package, they can buy a local sim card to take advantage of cheap prices for local data. With AT&T currently charging $100 for 30 days access to unlimited messaging and 800MB of international roaming data, Apple’s Upgrade Plan allows savvy consumers to completely circumvent a profit center for the big carriers.

Creating Apple-focused rather than carrier-focused mobile customers.

Buying an iPhone in an Apple Store has been a regular practice for consumers since 2008 when the iPhone 3G debuted. Over time, however, the consumer’s link to their contract carrier meant walking into the AT&T or Verizon store from time to time to adjust or upgrade their plans. But once within the walls of a carrier store, consumers were susceptible to up-sells to non-iPhone devices, accessories and more. Users interested in Apple’s Upgrade Program will only be able to take advantage of the deal in Apple retail stores, where they’ll be enticed by Apple watches and other premium goods on those infamous wooden tables and white-washed shelves. The carriers could very well see a significant source of incremental retail traffic dry up as the Apple Store becomes the only store that consumers frequent for their wireless needs.
iPhone 6S - Rose Gold Selfie

Goodbye grey market

Typically, when a consumer is interested in upgrading early, they sell their previous iPhone on a site like Ebay or make use of one of several online businesses that will pay the user for their old phone and then flip that phone by selling it overseas or elsewhere online for a profit.
But with Apple’s Upgrade Program, the hassle of recouping the cost of an old phone is completely removed for consumers. While the program itself is designed to leave users with a fully paid iPhone after 24 months, those who wish to get their hands on the new iPhone can renew their obligation to Apple every 12 months. That means there’s no need to list the device on Ebay or Craigslist, get it appraised by a third-party purchaser (like Gazelle), or deal with the logistics of shipping. Consumers hand over an old device to the manufacturer, the manufacturer hands them a new (better) version.
In this way, the Upgrade Program allows Apple to better maintain the supply of iPhones on the open market, which means Apple has better control on resale value and pricing. Apple has more access to refurbished products, which it can sell to emerging markets at costs that may actually be lower than what third-party resellers would pay.

From cradle to grave: Vertically integrated efficiency

Finally, there’s huge potential upside for Cupertino if the the Apple Upgrade Program takes off: Recycling.
It takes a lot more work (read: resources, energy, money, time) to scout, mine and refine 7000 Series aluminum than it does to recycle it. Let’s get back to that logistical machinery. Tim Cook didn’t rise to the rank of CEO because he was some MBA that looked good in a suit. You may recall that Cook ran Apple’s worldwide operations for more than a decade; first as an SVP and then as COO, before assuming the top job at Apple. Regardless of his title, Cook’s role was to determine how to most efficiently build and source the necessary materials. The Apple Upgrade Program falls directly in line with that mission.
When the iPhone 7 comes out, presumably in fall of 2016, Apple’s Upgrade Program consumers will have the opportunity to turn in their iPhone 6S devices and walk away with Cupertino’s new hot toy. Apple can choose to refurbish and repair these older devices, or send them to factories where they can be dismantled — at an incredible scale– using the parts and materials for future iPhone 7s, iPhone 8s, iPads, Macs or any other devices that can take advantage of them.
Remember– “Apple products are made in the most environmentally free way possible,” which means not only being free of harmful toxins like mercury and beryllium, but also being made of “highly recyclable” materials like aluminum and glass. Let’s not forget that all smartphones and other popular electronic devices depend on hard-to-find elements known as rare-earth metals like Neodymium, which are always in short supply. Apple can produce newer devices more cheaply, using discarded devices to source these materials. Such action could keep costs down while continuing to move margins up.

Is leasing/early upgrading the future of Apple’s iPhone business?

As is the case in Hollywood, the technology industry loves a sequel. The iPhone, of course, is no exception. As Apple debuted their ninth iPhone, the iPhone 6S, it became clear that while the device was compelling to consumers, Apple’s leadership team has become laser focused on squeezing as much revenue as they can out of their flagship product. Whether it’s driving users to their store with the promise of cheaply accessible gadgets via a lease model, or recycling the valuable materials within the phones, Apple is in the business of making money by optimizing the way they not only build, but sell devices.

An Apple wireless carrier? Not a wise move.

Really, Apple?

Now you want to be my wireless carrier? Are you sure that’s wise? I mean, sales of iPhone — great as they are — did not meet analyst expectations last quarter. iPad sales continue to disappoint. No one knows the actual Apple Watch sales numbers, but it seems as if nearly everyone thinks they are below original estimates. Even your biggest supporters have been mightily disappointed lately in Apple Music, the once-ubiquitous iTunes, and your software.

Given that $90 billion, yes, billion, got whacked from your market cap soon after announcing last quarter’s results, perhaps now is not the best time to tackle an entirely new line of business, especially one as messy and price-driven as wireless service.

Earlier this week, rumors ran hot that Apple was in active talks to offer a “MVNO” in the US and Europe. A traditional MVNO, or mobile virtual network operator, is a company that provides mobile service — 4G, for example — but doesn’t own the actual infrastructure. Instead, the MVNO leases capacity from an actual carrier, an AT&T or Verizon, then sells this service directly to customers.

The opportunity

Companies like Disney and ESPN have tried and failed to launch a successful MVNO. The primary problem is that no matter what clever services you offer — ad-free radio streaming that doesn’t count against your data usage, or clips of last night’s top plays — the MVNO’s costs are inevitably higher than the actual carrier’s cost, those who own the equipment.

Apple no doubt believes it has a workaround. Unlike previous MVNO efforts, Apple makes its own smartphone. This opens up numerous untapped opportunities. For example, Apple might sell a monthly plan that includes the latest iPhone, voice and data service, free Beats 1 streaming, unlimited FaceTime calls, perhaps even a Discover Card-like discount on purchases when using Apple Pay. It’s a tantalizing idea. One bill, one service provider, everything you do on your iPhone all cleanly managed by Apple. Customers would no doubt love this.

There’s still another Apple advantage. Apple already uses a SIM card in select iPads that lets the customer choose from a variety of monthly plans or pay-as-you-go options. This current iteration is a bit crude but in theory, Apple could use it’s super-popular iPhone to force multiple carriers to compete on price, offering iPhone customers the very best price across a range of carriers.

The denial

Will it happen? Uncharacteristically for Apple, the company quickly and very publicly shot down the rumor:

“We have not discussed nor do we have any plans to launch an MVNO.”

I have problems with this denial.

Firstly, “plans to launch” leaves enormous wiggle room. At present, I do not have dinner plans for tomorrow, though undoubtedly it will happen. Secondly, Apple has been keenly interested in being an MVNO since before iPhone — back when the failed Motorola Rokr was the only ‘iTunes Phone’ on the market. That original Apple patent, which the company asked to extend in 2011, was created by Tony Fadell, the former Senior VP at Apple who went on to create Nest, the home automation hardware company now owned by Google. As the original Fadell patent makes clear, Apple’s proposed MVNO wouldn’t simply lease capacity from a single network, but pit carriers against one another.

Bids are received from multiple network operators for rates at which communication services using each network operator can be obtained. Preferences among the network operators are identified using the received bids, and the preferences are used to select the network operator for the mobile device to use in conducting communications.

There’s still another clue that Apple is interested in the MVNO opportunity, despite the denial. Just last month, the Financial Times reported that both Apple and Samsung were in “advanced talks” with GSMA, a global telecom industry consortium, on an embedded SIM (eSim) card that would let mobile phone users switch from one carrier to another on the fly. Right now, the traditional SIM card locks the user’s phone to a particular network, so the potential for the eSim, planned to launch in 2016, is huge. Maybe Sprint has excess capacity in Los Angeles and you choose Sprint. Then you travel to Silicon Valley, where T-Mobile offers the best price. In theory, Apple could have software to automate all this for you, choosing the best option based on price, time and place. For those who travel from country to country, this could be a godsend.

With an MVNO, Apple controls the all the important pieces, the smartphone, the customer relationship, and has reduced carriers to little more than dumb pipes.

The problem

This is almost certainly doomed to fail.

The iPhone is the primary driver of Apple profits. Competing directly against the very carriers who market, sell and support these devices seems to stretch the bounds of corporate hubris.

Plus, the carriers control an extensive retail footprint. Apple has 265 Apple Stores in the US, but there are over 4,000 Verizon and AT&T retail outlets. Add in Sprint, T-Mobile and others, and an Apple MVNO could lead to each of these carriers limiting their support of iPhone. It’s an unnecessary risk.

As Apple blogger John Gruber noted:

Apple is a partner with all the carriers around the world that support iPhone. They can’t compete against them while partnering with them.

There’s also the potentially devastating hit to Apple’s good name. Probably the most frustrating failure of iPhone, of any smartphone, with the possible exception of battery life, is a failed connection. Dropped WiFi and spotty cell coverage can be rage-inducing. We rightly blame such failures on the carrier. With an Apple MVNO, Apple itself becomes the full target for our rage. Given that Apple’s brand is the most valued in the world, running their own MVNO seems foolhardy.

Proceed with caution

Apple is famous for seeking to own all the core pieces that directly contribute to the customer experience. Cellular service is a core aspect of that, no doubt. Meaning, no matter what an anonymous Apple spokesperson says, this rumor is unlikely to die. This is doubly so now that Google has stated it will be launching an MVNO-like service. Apple should let the urge pass.

Becoming an MVNO is simply too much risk for too little reward. Apple’s time can be better spent on fixing the problems it already has, not on adding new ones into the mix.

IBM acquires telco-data specialist The Now Factory

IBM is going to acquire a Dublin, Ireland-based company called The Now Factory, which specializes in providing customer and network analytics for wireless carriers. The idea is that better, faster data about their networks can help carriers optimize performance and better serve (or target) customers based on their usage behavior. The Now Factory seems similar in vision to the San Mateo, Calif.-based Guavus, and it seems logical the two will cross paths more often thanks to IBM’s global reach.

Charts: If you’re concerned about privacy, don’t use your cell phone

Law enforcement and other government bodies, it seems, aren’t shy about asking for or demanding data about users from wireless carriers. All told, wireless providers received more than 1.3 million requests for user data last year, and requests are increasing every year. Here are more details.

Verizon buys Hughes Telematics to target the connected car

Verizon’s ambition to connect more than homes and phones just zeroed in on the automotive market. It announced on Friday it is buying Hughes Telematics for $612 million in cash, gaining the company’s crop of machine-to-machine (M2M) connected car technologies and services.