Don't Ignore Signs of Tepid iPhone Demand

It was always going to be tough to get a handle on the initial sales success of the latest iPhone models. But some early signs are not encouraging for Apple Inc.
The latest dour data came from AT&T Inc. late Wednesday. As part of an early disclosure of selected third-quarter financials, the company said the number of its mobile subscribers that had swapped out old smartphones for newer models fell by 900,000 from the third quarter of 2016.
The quarter included about a week of U.S. sales for Apple’s iPhone 8 models, one of two new smartphone lines the company debuted last month. If the iPhone 8 had been a hit out of the gate, then I would have expected AT&T’s upgrade number might at least have fallen less dramatically.

Changing Times
Compared with two or three years ago, there has been a notable decline in the percentage of U.S. mobile customers who buy a new phone in a given year
Source: Nomura Instinet
Note: The upgrade rate is a simple average of the percentage of AT&T, Verizon, T-Mobile and Sprint customers who buy a new phone in a given quarter.

Some analysts have expected new smartphones from Apple and other companies to push up the share of people who upgrade to new phones, after several years of trending downward. But Jefferies analysts estimate that AT&T’s disclosure implies an upgrade rate of roughly 4 percent in the quarter — meaning that is the share of AT&T’s existing customers on rolling contracts who opted to trade up to a newer smartphone. The stock-research firm had expected a rate of 4.5 percent. In the third quarter of 2016, AT&T said its upgrade rate was 5.1 percent for its U.S. contract customers.

One week of sales from one phone carrier isn’t enough to call the iPhone 8 a hit or a flop. But astute Gadfly readers know these phone upgrades are essential for Apple. AT&T’s disclosure is only one data point, but it contributes to the feeling that Apple may have misfired with the iPhone 8.
Since Apple released the iPhone 8 and its more-expensive iPhone X sibling, investors have alternated between worry and encouragement. The initial professional reviews of the iPhone 8 weren’t over the moon. Particularly when compared with the iPhone X, the iPhone 8 seemed like the less-capable kid sister, and not much of an improvement on the prior year’s iPhones.
Many analysts have said people who are most likely to buy new iPhones will wait until November or later, when the iPhone X model will go on sale. The optimistic take is that slow initial sales of the iPhone 8 line are a good sign for Apple, because it may mean more people will instead buy the more-expensive iPhone X.

Hope and Fear
Apple’s stock price initially dipped after the September launch of the new iPhones, but lately shares have clawed back some of their losses
Source: Bloomberg

But Apple absolutely needs the iPhone 8 to sell well, too. There is a limited supply of essential parts for the iPhone X models, and the company can’t make enough to cover the 250 million or so new iPhones expected to be sold globally in the next year. The iPhone 8 needs to be a palatable Plan B for those people who can’t get their hands on the limited number of iPhone X models, or can’t stomach the $1,000-and-up price tag.
At least in the U.S., the iPhone 8 should far outsell its sibling. In a recent Morgan Stanley survey, 34 percent of respondents in the U.S. who said they planned to purchase a new iPhone said they would opt for the iPhone X. (A majority of respondents in China — arguably the most important growth market for Apple right now — said they planned to buy the iPhone X model.)
AT&T’s disclosure also isn’t great news for Samsung, which started selling a new phone in the third quarter, too. But in the U.S., Apple’s biggest competition isn’t Samsung or other smartphone companies. The number one rival is Apple itself.
The company sells the vast majority of new iPhones to people who already own one. And for many of these people, the alternative to bringing home a shiny new iPhone is holding onto their existing phones — duct-taped, shattered screens and all — for a bit longer. If Apple and Samsung aren’t persuading people to ditch their old phones right now, then their sales might not go up as quickly as investors expect.
Apple will release its own third-quarter financial information soon, giving investors a better, although still incomplete, picture of iPhone demand. No matter the sales numbers for the next few months, the real test will be
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