Apple's iPhone upgrade plan helps the company rake in more money per phone

During last week's new products announcement, Apple introduced a new plan that would allow someone to pay $32 a month for the Apple iPhone 6s, and exchange it for the newest version of the phone every 12 months. The key to the plan is that the customers signing up for it are leasing the iPhone, as opposed to making a downright purchase of the handset. This means that the phone has to be returned in good condition. 

Apple's plan is not the cheapest. Sprint has its iPhone Forever plan priced at $26 which also includes a 12-month update cycle. T-Mobile is allowing JUMP! on Demand subscribers to pay $0 down and $20 a month over 18 months for the Apple iPhone 6s, and $24 a month over 18 months for the Apple iPhone 6s Plus. Once the 18 months is up, T-Mobile subscribers can turn in their phones and walk away, or pay an additional sum to keep the phones. For the iPhone 6s, that figure is $164 which works out to a $524 total price for the new model. 

Amit Daryanani, an analyst with RBC Capital Markets, explains how Apple makes more money with the leasing option. Daryanani says that the typical iPhone is priced at $700 (and costs $350 to build). The first year of Apple's leasing program, Apple takes in $384 ($32 multiplied by 12). After the first year, the customer returns the phone for the next model. The first unit is refurbished by Apple and sold outright for $500. Thus, Apple takes in $884 in revenue over two years, on just one handset.

The leasing program also helps Apple with another metric that had started going against it. From 2013 to now, the upgrade cycle for the iPhone has been stretched out to 26 months from 22 months. But the leasing program offers an upgrade every 12 months, and while not everyone subscribed to the program will take advantage of it, there should be enough that do, allowing Apple to see the iPhone upgrade cycle drop substantially over the next 12 to 24 months. Daryanni, the RBC analyst, says "You essentially create a certain group of your user base that is going to be on a 12-month upgrade cycle."

Like a typical Wall Streeter, the analyst plugged the deal into some spreadsheets. His thoughts? "When I run the math, this is a very gross-margin-accretive investment for Apple."

Thanks for the tip!

source: Barron's