Apple announced its new iPhone 6S smart phones on Wednesday, touting unique features like 3D touch and improved camera and Touch ID hardware. But one less-heralded change is, I think, going to have an even bigger impact on iPhone sales going forward. That is, Apple will now sell you new iPhones on a curiously reasonable monthly plan.
Under the terms of a new offering called the iPhone Upgrade Program, Apple will now sell iPhones on installment plans directly to customers. This is a big change from the past, where you would buy an iPhone “at” Apple (either online or at its retail stores) but were really upgrading or starting a new 24-month plan with a wireless carrier. (Or, in more limited cases, you would just buy the phone outright from Apple at a cost of $650 to $950 upfront.)
The iPhone Upgrade Program exists because carriers in the United States are finally dropping the subsidized phone model, which hid the true price of a phone. Under this misguided sales model, a user would pay $0 to $300 upfront and then the carrier would silently add a monthly fee to your bill, with the phone being paid off after two years. The reason this model is unfriendly to consumers is that the monthly cost of the phone wasn’t removed from your bill when the phone was paid off. So if you kept a phone for more than two years, you were wasting money.
On that note, subsidized phones aren’t going away because wireless carriers don’t want to rip-off customers. They’re going away because more and more customers want to upgrade more quickly, in many cases every single year. So US carriers have been phasing out the subsidized plans in favor of new types of plans in which the cost of the phone is explicitly built into your monthly bill—you know exactly what it is—along with the cost of services like calling, texting and data. Under these new types of plans, too, you are often given upgrade rights after just a year, so you can switch phones when you want and not pay additional fees.
A side-effect of this change is that you are free to bring your own unlocked phone to the carrier. When you do so, you only pay for the calling, texting and data plans, not for the phone. For people who own an unlocked phone, this means saving a lot of money (typically $20 to $40) each month. But it also enabled Apple to create the iPhone Upgrade Program. Customers who choose this route will pay two bills—one to Apple and one to their wireless carrier—each month. And I suspect that the prices Apple charges for the iPhone each month will be slightly higher than the prices you will see at the carriers. So why would anyone go this route?
As it turns out, there are many reasons.
Most obviously, the iPhone Upgrade Program also lets you get a new iPhone every year. That is, you get an iPhone 6S from Apple, pay your bill each month, and then when Apple releases the iPhone 7, you upgrade to that. Apple gets the iPhone 6S back and you keep paying the same (or equivalent) monthly bill, or you switch to a different model (different storage, perhaps, or a Plus model) and the bill changes. It’s ideal for people who always want the latest iPhone.
The iPhone 6S you get from Apple under the iPhone Upgrade Program is unlocked and has universal wireless radios, so you can choose any carrier. (Here in the US, that means all of the majors: Verizon, AT&T, T-Mobile and Sprint, and probably most minor carriers as well.) That means you can switch carriers anytime you want, go with pay-as-you-go plans, whatever. It’s your choice.
This program also includes AppleCare+, for support. This is important because iPhones are incredibly fragile and easily broken. (Though even AppleCare+ isn’t going to help too much if you keep breaking your screen. Fortunately, iPhone screen replacement costs are actually reasonable now too.)
Pricing is also reasonable, especially when you consider the above-mentioned benefits. A base iPhone 6S with 16 GB—which everyone should ignore and jump up to the middle model—will cost $32 a month. A very high-end iPhone 6S Plus with 128 GB of storage will cost $47.45.
For comparison purposes, my iPhone 6 Plus cost $850 (as does its replacement, the 64 GB iPhone 6S Plus) outright. So this device would cost $42.45 a month on the iPhone Upgrade Program, or about $510 for one year. Since the program is based on two years of installments, that means the two-year cost would be over $1000, which sounds like a big profit margin for Apple. But remember, you’d also get an iPhone 7 Plus (or whatever) after one year. And you could just keep moving forward like that, getting a new phone each year.
This is, in other words, the subscription music model … applied to phones. And as with subscription music, I think this makes a ton of sense for most people. I expect it to be very popular. In fact, I expect wireless carriers to have to duplicate it, in order to compete. (I know some carriers offer something similar, but I bet Apple makes it universal.) Either way, it’s a win.