With the iPhone Upgrade Program, Apple is starting to stake its position with its carriers.

Apple’s Carrier Relationships and the new iPhone Upgrade Program

Prologue

Long, long ago, or atleast what feels like an eternity today, Apple, the maker of the colorful iMacs and the recently successful iPods, decided to make a phone. They went to the biggest player in town, Verizon, which politely declined to carry it. They struck a exclusive deal with AT&T instead that would prove to be a pivotal moment for the industry in more ways than one. A few years later, Apple launched on Verizon and followed it with Sprint and T-Mobile launches. With every subsequent carrier launch, the iPhone was much bigger than before and Apple was able to negotiate deals that were unheard of in the industry and unique to Apple.

Today
In its Fall event on September 9th, Apple announced a whole bunch of new things and big updates (iPad Pro, tvOS, WatchOS 2, new Apple TV, etc.) alongside the latest iPhones- the iPhone 6S and the iPhone 6S Plus.

iPhone 6s

The iPhone 6 and 6Plus announced last year have been huge successes for Apple. They have sold incredibly well and continue to do so. The 6S and 6S Plus will continue that trend of selling well across the world. Where Apple is attempting something quite interesting with a lot of long term impact, is the launch of the iPhone Upgrade Program.

The iPhone Upgrade Program
Apple describes the Apple Upgrade Program thus, ” The iPhone Upgrade Program gives you an easier way to get a new iPhone every year, and the security and protection of AppleCare+. You’re even free to choose the carrier and rate plan that work for you. After 12 installments, you can get a new iPhone and start a new iPhone Upgrade Program. No more waiting for your carrier contract to end. Just trade in your current iPhone for a new one, and your new program begins. Because the iPhone Upgrade Program isn’t tied to a single carrier, you don’t need a multiyear service contract. If you don’t have any carrier commitments, you’re free to select a new carrier or stick with the one you have. A Specialist can answer questions and help you set your iPhone up the way you like.”

“Because the iPhone Upgrade Program isn’t tied to a single carrier, you don’t need a multiyear service contract. If you don’t have any carrier commitments, you’re free to select a new carrier or stick with the one you have.”

Let us try to parse what Apple is attempting to say here. The iPhone Upgrade Program is Apple taking control of your relationship with your carrier. Yes, the same carrier will continue to offer you their network for use for a fee (your monthly bill). But now, with the Upgrade Program, the phone purchase process, the monthly payment for the phone (starting from $32 just for the phone), the carrier selection (and subsequent re-selection upon the end of contract period), repairs, and much more will flow through Apple.

apple-carriers

Apple, like it does in every other aspect of its business, would like complete control of its product experience. On the iPhone, there are two key pieces of the puzzle that are missing from Apple’s arsenal- the cellular technology (modem business) and the carrier portion. For now, Apple relies on Qualcomm (and if the rumors are true, soon to be, Intel) for its cellular solutions. It would not be a stretch to see Apple have its own modem team, a few years from now.

The other key piece of the puzzle is the carrier engagement. Carriers have spent billions buying spectrum and deploying tens of billions of dollars worth of equipment to offer high speed data and HD voice capabilities to the smartphone. They would like to continue owning the connectivity puzzle in their own terms. This conflicts with Apple’s philosophy and there has been an interesting dynamic between the two over the past few years. Apple has enjoyed more control over its product experience than any other handset manufacturer by far. Apple would prefer to have its customers deal with just Apple and not Apple and the carrier.

With the iPhone Upgrade Program, Apple is slowly but definitely taking charge. This program will allow Apple to have a long lasting relationship with its users, irrespective of who owns the pipe. By getting its users to sign up for the Upgrade Program which is similar to carrier programs with the added incentive of the AppleCare+ thrown in ($129/yr for iPhone 6S, interestingly increased from $99/yr for the iPhone 6 until yesterday), Apple is making a compelling case to the consumer to stop dealing with the carrier. And given how carriers have treated their customers historically, customers might be more than willing to do so. In return, Apple gets its iPhone users to never consider switching- by signing up for the program, the user is compelled to stay with Apple or get penalized for it. A win-win for Apple.

Epilogue

Apple is just getting started. The next move is on the carriers. Letting Apple take ownership of the entire process removes them from the equation for all but the service provided. This prevents them from any up sells, direct customer engagement and more. Will they chose to accept this new dynamic since customers are so enamored by the iPhone or will they fight it?

For Apple, they need to tread carefully. The reason they control their destiny is because of the compelling product that is the iPhone and the customer demand associated with it. Part of it was also fueled by carriers aggressively selling it to customers. If carriers choose to focus on selling Android phones over iPhone, there will eventually be an impact. For now, the iPhone is the king. The next chapter in this story is waiting to be written.

This story is far from over.

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