Apple trade-in program may hedge iPhone business

August 27, 2013, 11:23 AM

Source:   http://blogs.marketwatch.com/thetell/2013/08/27/apple-trade-in-program-may-hedge-iphone-business/

Apple Inc. is reportedly preparing a long-rumored iPhone trade-in program ahead of an expected launch of new devices next month — a program that could hedge part of the company’s lucrative smartphone business against an onslaught of competition from cheaper rivals.

  

Reports at the MacRumors and 9to5Mac blogs say Apple /quotes/zigman/68270 /quotes/nls/aapl AAPL 0.12% is preparing employees at its retail stores to begin the trade-in program in September. Apple is expected to unveil its next iPhone models  at a Sept. 10 event, with a launch to follow later in the month. The launch will allegedly include the iPhone 5S and a new lower-end model that has been dubbed as the iPhone 5C.

Apple has been rumored for months to be developing its own trade-in program, as wireless carriers in the U.S. have already been offering similar deals for customers to upgrade to new smartphones. Such programs can cut the retail price of a new smartphone in half — depending on the model and condition of the phone being traded in — and allow carriers to hold on to their subscriber base and reduce the dreaded “churn” of customers flipping between carriers in hunts for cheaper deals.
For Apple, a trade-in could provide a two-fold benefit of allowing one segment of customers a cheaper way to stay with the iPhone, while allowing older, used models to be recycled to price-conscious customers in other markets. Sales of the iPhone have begun to flatten as the device is considered too expensive for many in emerging markets, where competitors like Samsung and other Asian manufacturers have a wider array of devices available.

But the company will have a fine line to balance here. Flooding the market with older, used iPhones runs the risk of cannibalizing sales of newer devices. Toni Sacconaghi of Bernstein says Apple could possibly manage this risk by speeding up the replacement cycle of new iPhones. “Our analysis suggests that a decline in the average replacement cycle from ~2 years to ~1.8 years could fully offset the negative cannibalization impact from used phones to gross profit,” Sacconaghi wrote in an Aug. 12 report.
He added, though, that such a reduction in the replacement cycle “would require 20% of subscribers to upgrade every year, and the remainder to continue to upgrade every 2 years — which we think may be challenging to do.”

A key factor for Apple may be whether the company has control over how and where its used iPhones are sold. It is common for third-party brokers to buy up used devices and re-sell them into new markets. Sacconaghi says Apple may be able to mitigate its risk with used iPhones by controlling which markets the older devices go into, and what prices they are sold at.
“It is unclear if Apple would be able to dictate price levels or where used devices could be sold, if the program is – as expected – run by a third party,” he wrote. “Historically, this has not typically been the case, but Apple, of course, often sets its own terms.”

– Dan Gallagher