Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.
This year will be a test of Americans' appetite for even more costly smartphones. That makes it tough to be confident in predictions of a smartphone rebound.
The U.S. starting price for high-end smartphones such as Samsung's Galaxy line and Apple's iPhones had settled around $650. Not anymore.
Samsung on Wednesday released the latest lineup of its Galaxy smartphones, which start at $750 — about $100 more than comparable models in prior years. Apple, too, has subtly dialed up iPhone prices by introducing features to push people toward higher-cost models.
The average revenue Apple generates from each iPhone reached a record of $695 in the December quarter. The 2017 iPhone lineup is expected to add a new model at perhaps $1,000 or more.
Smartphone sticker price inflation has implications beyond household budgets. Higher prices, combined with Americans' changing smartphone-buying behavior, make it difficult to predict phone sales by relying on patterns from even two or three years ago. The smartphone market has unmistakably changed — with the biggest implications for Apple Inc.
After the first iPhone sales decline in history, Apple's stock price has recovered from 2016 lows, mostly on expectations of a sales "super cycle" spurred by the next versions of the device.
Naturally, Apple has not discussed its plans, but reports have said Apple might shift from two to three iPhone models in 2017. Two will be refreshed versions of the iPhone 7 and the larger-screen iPhone 7 Plus. A new model may have a more vibrant type of screen with extra real estate thanks to skinnier frames around the phone's edges. Analysts have forecast this new iPhone may cost roughly $1,000.
Wall Street in recent months has grown increasingly confident that a significantly overhauled 2017 iPhone will significantly jolt sales, just as the 2014 introduction of the first larger-screen iPhone did. Sales of iPhones jumped 37 percent in Apple's 2015 fiscal year, the first full year with the iPhone 6. It's been downhill for iPhone sales ever since. (Samsung's smartphone sales also fell last year.)
But analysts are expecting the tide to turn. On average, analysts who follow Apple expect the company to sell 239 million iPhones in its fiscal year ending in September 2018, or 13 percent more than the 212 million iPhones sold in fiscal 2016. Some analysts have recently become much more bullish, based in part on expectations that people would start buying new or replacement iPhones at a rate closer to 2014 patterns than to 2016 ones.
Here's a big wrinkle, however. In the U.S., smartphone buying has changed completely since 2014. People are now paying full freight for their phones — either $650 or more up front or in monthly installments. Back then, U.S. phone carriers subsidized smartphone prices so many people were lulled into believing a high-end smartphone like the iPhone cost just $200. Those phone subsidies are essentially gone in the U.S.
Whether it's because phones don't "cost" $200 anymore, or because the improvements in phone models are more subtle than wow, Americans aren't buying new smartphones as often. The average length of time between people replacing their smartphones was about 31 months in 2016, up from nearly 25 months in 2014, according to telecom industry consultant Chetan Sharma. If sticker prices for smartphones go up, that may give people one more reason to hold onto their old iPhones for a little longer.
Predictions of a “super cycle” could still pan out even if Americans don’t revert back to 2014 buying patterns. The number of iPhone owners is 79 percent higher than it was in 2014, according to Bernstein Research estimates, which makes a sales lift more likely even if a relatively small percentage of iPhone owners buy a new, pricier model. There are some signs that shoppers in China — Apple’s second-largest market — are eager for new iPhones.
But Apple has misjudged iPhone buying behavior before, and it could again. The combination of rising smartphone prices and longer stretches between upgrades means Apple will have a hard time turning the calendar back to 2014.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
When Apple announced the U.S. launch of the iPhone 6 in September 2014, it didn't even give the "real" price because that was not how Americans purchased phones.
Apple doesn't break down iPhone sales by country. But it does disclose that sales in North America, South America and "Greater China" — China, Hong Kong and Taiwan — together generated nearly two-thirds of the company's revenue in fiscal 2016.
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