Insights into the Smartphone, Tablet, and Connected Smartwatch Markets

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Samsung’s Lower Cost Note 10e

We expect Samsung to launch a lower-cost Note 10 alongside the premium Note 10 in late August. The premium Note 10 will have a 6.8” WQHD+ screen for ~$1,200 while the value Note 10e will have a 6.3” FHD+ screen for ~$1,000. We do not expect a meaningful lift in overall Note volumes y/y and doubt traditional Note buyers will gravitate to the value variant. We believe most Note 10e sales will come at the expense of GS10s, in particular, the 6.4” GS10+. However, we can imagine the Note 10e having late cycle success, like the iPhone XR, if discounted to a more mass market-friendly ~$750. This would offer the non-enthusiast a premium device with the differentiation of the S Pen and a potentially compelling 4Q19 alternative to the Pixel 4 and OnePlus 7T launches.

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Samsung A-Series Migration

With the A50 ($350) launch at Sprint and Verizon, Samsung has begun to shift away from its J-Series devices. Thus far, the A50 has been exceeding low expectations due to generous specs for the price, including a 6.4” screen and triple rear cameras. With US installment pricing having hollowed out the $250-$500 price band, we continue to believe the A50 will sell in limited volumes. The more significant impact of the A-Series migration will come with the July launches of the A10e ($180) and A20 ($250), replacements for the popular J3 (~$165) and J7 (~$250), respectively. The A-series offers considerably more value at roughly the same price. The A10e has a 5.8” vs. 5.0” display and 32GB vs. 16GB base storage compared to the J3. For approximately the same price as the J7, the A20 has a 6.4” vs. 5.5” display, dual camera vs. single and 4,000mAh fast charging battery vs. 3300mAh. While Samsung will likely cede some entry tier volume to LG and Motorola, we could see the A-series benefiting from entry-level smartphone buyers increasing willingness to spend slightly more.

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Pixel 3a/XL Thoughts

In years past, a device’s first 30 days of sales was a clear predictor of lifecycle performance. In the era of the $1,000 smartphone, we see two distinct phases of demand, enthusiast followed by mass market. AT&T highlighted this trend with the iPhone XS/XSM launch leading to 14% y/y growth in 3Q18, followed by a 21% decline in 4Q18. We see the same dynamic with Samsung’s GS10s. Preorders and first week sales were up 25%+, followed by considerable weakness. In the mass market phase, the appeal of the latest and greatest has waned and the stigma of buying a “less than” flagship shifts to the pragmatism of good value. Looking ahead, Samsung’s GS10e is unlikely to experience the late cycle strength of the iPhone XR due to a smaller percentage base of mass-market consumers and a screen size we feel is “out of fashion” with the Android mass market.We continue to maintain low expectations for the $400-500 Pixel 3a/XL. Last year Samsung’s A6 was in no way a success and is a good proxy for the Pixel 3a, which has the same price, screen size, and screen-to-body ratio. The pricing advantage of $400 smartphones is diminished not only by discounts on flagships (bringing them to ~$500 on average when blending promotional dollar value and customer applicability) but also by monthly payment terms, an integral part of rising premium smartphone prices. We believe the 3a will perform better than average as an unlocked device and offers a low-risk path for Google to expand to carriers beyond Verizon ahead of the Pixel 4 going across all carriers. At $400-500, they are too expensive for a low-end buyer and too compromised for a premium buyer and instead are sitting in “no man’s land.”

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Flagship Phases

In years past, a device’s first 30 days of sales was a clear predictor of lifecycle performance. In the era of the $1,000 smartphone, we see two distinct phases of demand, enthusiast followed by mass market. AT&T highlighted this trend with the iPhone XS/XSM launch leading to 14% y/y growth in 3Q18, followed by a 21% decline in 4Q18. We see the same dynamic with Samsung’s GS10s. Preorders and first week sales were up 25%+, followed by considerable weakness. In the mass market phase, the appeal of the latest and greatest has waned and the stigma of buying a “less than” flagship shifts to the pragmatism of good value. Looking ahead, Samsung’s GS10e is unlikely to experience the late cycle strength of the iPhone XR due to a smaller percentage base of mass-market consumers and a screen size we feel is “out of fashion” with the Android mass market.

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The Power of T-Mobile’s Down Payment"

As we wrote last year, T-Mobile’s down payment requirement for devices above $750 continues to limit sales of super premium devices. While the other national carriers had GS10 preorders up 50%+ y/y, T-Mobile was flat. Through March the other national carrier’s GS10 sales were up slight y/y, compared to the GS9s, while T-Mobile’s were down over 30%. Interestingly, it appears T-Mobile’s overall value proposition along with growing smartphone apathy from consumers is allowing the carrier to go mostly unscathed.

Samsung Galaxy S10

Samsung Galaxy S10 Preorders

Samsung Galaxy S10 preorders are ~50% higher y/y across the big four national carriers. AT&T is up the most, followed by Sprint and then Verizon. However, T-Mobile is the weakest and is roughly flat y/y, as its more value-centric customer base and down payment requirement continue to limit super premium device sales. Although we are now modeling slight y/y growth in the first few months of sales, we remain cautious and would not be surprised if, similar to Apple in 4Q18, trends slowed considerably after 30 to 45 days, once enthusiast demand has slowed.

Samsung GS10e vs. Apple iPhone XR

Comparing "Value Flagships"

We are interested in the market reaction to the different “value flagship” strategies from Samsung and Apple this year. Within Apple’s flagship portfolio, the value iPhone XR ($750) has a larger screen at 6.1” than the more premium ($1,000) iPhone XS at 5.8”. While the iPhone XR failed to meet high 4Q18 expectations, the device is now clearly the best selling iPhone. Within Samsung’s flagship portfolio, the $750 GS10e has a smaller screen (5.8”) than the more premium $900 GS10 (6.1”) and $1,000 GS10P (6.4”). As Samsung transitions to mass-market consumers this summer, we are concerned the smaller screen will overly highlight the device’s value status and thus limit its ability to ramp. However, Samsung will have a value iPhone XS sized device which its base could embrace.

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US Hitting New Lows

The 4Q18 postpaid smartphone market declined 11% y/y, with prepaid down 22%, leading to the largest total market y/y decline to date of 14%. A lack of upgrade eligible carrier promotions was a critical driver of postpaid weakness. Even T-Mobile, with the most aggressive promotions in 4Q18, reported postpaid smartphone activations down 11% y/y. Other drivers of postpaid weakness include higher smartphone pricing, mild improvement in smartphone utility, and increased smartphone durability. Prepaid declines were more surprising, driven in part by an ongoing transition to higher quality and longer lasting prepaid smartphones. We believe as the prepaid market has matured, consumers recognized the benefit of moving beyond an entry-level device and are now upgrading/switching less. With continual declines in 5G expectations for 2019, we would not be surprised if the total US smartphone market declines by 10%+ this year.

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New Price Tier Breakout?

We increasingly believe the $500-$600 price band has the potential to expand in 2019, especially for Android devices. This is driven by the 2018 success of the OnePlus 6T at T-Mobile, which offered a flagship quality device at $580. In response, we believe Samsung will lower the GS9/GS9P prices to $500/$600, following the GSX launch in March. If so, we think price-conscious Android consumers unwilling to break the $1,000 price barrier could increasingly choose a year-old Samsung flagship or the latest OnePlus device offering only minor compromises versus their $1,000+ alternatives. In 2019, we are interested in learning how consumers will respond to $1,200+ 5G smartphones and $2,000 foldable devices. Will consumers prefer a value device at $500-$600 in protest of ever increasing prices or does a $2,000 device in a carrier’s portfolio suddenly make a $1,000 device look less egregious?

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iPhone XR Slowly Ramping

While the iPhone XR did not drive material upgrades and underperformed high expectations, we did track strong gift-giving sales over the holidays, with its mix accelerating throughout December and into early January. We believe the iPhone XR will resonate with the more casual and pragmatic 1H19 buyer who tends to focus on utility and value over fashion and status. From a cumulative sales perspective, we could see the iPhone XR overtaking the iPhone XS Max at some point in the 1H19, and as early as the end of Q1. The return of carrier upgrade-eligible promotions (see below) and increased Apple direct sales, including attractive trade-in offers, are the keys to 1H19 iPhone XR performance.

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Upgrade Eligible Promotions Vanish

If we exclude new line or TV-required promotions, token trade-in offers of $200 or less, and Verizon’s Black Friday discounts, only T-Mobile offered an Apple or Samsung upgrade-eligible promotion during the 2H18. The US national carriers have historically offered meaningful upgrade promotions, including the extremely aggressive free iPhone 7 (or $650 discount) with iPhone 6 trade-in two years ago. Today, upgrading customers pay full price for a smartphone significantly more often, and we believe many are choosing to delay upgrading in hopes of an eventual carrier promotion. Combine this with continually increasing smartphone pricing, and it makes sense consumers are willing to wait.

OnePlus 6T

Rising Star

The OnePlus 6T launched at T-Mobile in early November and exceeded our conservative expectations. Consistently described as a high-quality flagship smartphone for less than $600, the lack of a mainstream brand, carrier track record, or broad portfolio did not limit sales. We believe OnePlus could disrupt premium Android vendors and is in the process of becoming the challenger brand and Android alternative to Samsung at T-Mobile, a role currently held by LG and formerly HTC, and played by the Pixel at Verizon. Thus far, quality and customer service have not been issues. If OnePlus continues to execute with (sub $600) flagship devices, leveraging the scale and innovation from their Oppo and Vivo parent company, we believe current premium Android OEMs will struggle to respond without jeopardizing their super-premium (~$1,000+) device sales.

Foldable Samsung

On the Path to $2,000

The Red Hydrogen One launched this month with weak initial sales and horrible reviews, however, at some point, AT&T and Verizon, thought the device would sell at $1,300. Samsung’s rumored GS10 triplets are expected to follow Apple’s current flagship pricing (~$750-$1,100) with an additional larger screen 5G variant costing as much as $1,300. Add in Samsung’s rumored $2,000 foldable smartphone, and there are few signs, (except for the OnePlus 6T) of smartphone price increases slowing. While we cannot predict how the market will respond to these astronomical price increases, we do see a higher than expected mix of Apple’s $1,000+ XS and XS Max, albeit at the expense of overall volumes. With smartphone utility surpassing the PC for the masses, we believe if future smartphones can last as long as a PC (4+ years), maybe $2,000 will appear reasonable at some point?

iPhone XR Colors

Waiting on iPhone XR

We have been surprised to see the iPhone XR overshadowed by the XS and XS Max thus far. While the device’s reviews and sales reps impressions have been positive, we are beginning to feel like the pragmatic iPhone 6/6S customer base we expected to purchase the XR are in much less of a hurry to upgrade than we expected. We believe the iPhone XR may ramp later than our initial forecast due in part to having become “lost in the shuffle” with these mass-market consumers following a delayed launch post announcement. An interesting sentiment we are picking up from our surveys of carrier stores is, regardless of great reviews and a relatively premium price, the XR is still a “step down” from the XS and XS Max. It is possible that with an elongating upgrade cycle, more consumers are interested in future-proofing their devices, and thus could be more hesitant to buy a “stepped down” device.

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Carrier Promotions Weak

Carrier promotions are an essential driver of our 4Q18 forecasts. In early October, we were surprised by T-Mobile’s removal of the down payment requirement for the Note 9, iPhone XS and XS Max, as well as offering $390 trade-in value for iPhone 7 without a new line requirement and adding a 36-month financing option. We were even more surprised by Verizon and AT&T’s lack of response to such an aggressive offer. In fact, entering 4Q18 AT&T reduced their promotions by reinstating the DirecTV requirement to qualify for their BOGO offer with a new line. Overall, with Sprint remaining aggressive, and AT&T and Verizon not responding to T-Mobile, the promotion environment has proven weaker than our expectations thus far in 4Q18. Furthermore, today (11/8) T-Mobile ended its no down payment promotion on the XS and XS Max. We can only guess at what we will see for holiday promotions, but if October is any indication, we are not expecting much.

T-Mobile's Down Payment

T-Mobile’s Down Payment

T-Mobile instituted a down payment for smartphones above $720 with the launch of the Galaxy S8 in 2017. The impact has not only slowed T-Mobile’s super premium smartphones but also elongated the smartphone upgrade cycle at T-Mobile. Interestingly, while last year’s Note 8 required a down payment, the Note 9, with only a $80 higher down payment, is down over 50% vs the Note 8. Conversely, Note 9 sales at AT&T, Verizon, and Sprint are flat to down high-single digits y/y. Highlighting the power of the down payment, sales of the $720 GS9 are twice as high at T-Mobile than the other national carriers when comparing Samsung flagship mix. Assuming the combined T-Mobile/Sprint follows the down payment strategy, the 2H19 could see decreased premium smartphone sales as the aggressive Sprint leasing programs, which allows even credit challenged customers to get into super premium devices, gives way to T-Mobile’s down payment strategy.

iPhone XR

Updated iPhone Thoughts

As we wrote last month, our base case assumption for the refreshed iPhones was 50% iPhone XR, 25% iPhone XS and 25% iPhone XS Max. We believe the limitations of the iPhone XR vs the XS and Max will be unnoticed by the mass market and view the $250 discount vs the iPhone XS as likely to drive iPhone XR mix to 60-65% and decrease the iPhone XS to 10-15% and the Max to 20-25%. We believe the iPhone XR will offer the iPhone 6 & 6S base of customers a “reasonably” priced device with the look and features worth the price to upgrade. While still early, initial trends indicate enthusiasts have no problem spending $1,100+ on the iPhone XS Max. As of the end of Sep, the iPhone XS Max is far more supply constrained than the iPhone XS with our sales mix at 60/40 to the Max. We would not be surprised to see trends slow materially over the next 3-6 weeks as either the enthusiast demand is satisfied, and/or the iPhone XR launch drives hesitation for the Max’s almost 50% premium to the iPhone XR.

Samsung Note9 $1250

Support for $1,200+ Smartphones?

We tracked final Note 9 pre-order mix of ~15% for the $1,250 512GB variant at AT&T and Verizon, much higher than our low single-digit expectation. While we expect the mix to drop to 1-2% post-launch, Note 9 preorders show that certain groups of customers are willing to pay laptop prices for the latest full-featured smartphone. The utility from a smartphone has undoubtedly surpassed the PC and interestingly the 512GB variant Note 9 has storage capacity in-line with laptops. The question is how long, if ever, will it take for the mass-market to justify breaking the $1,000 smartphone price barrier.

iPhone X Models Pricing

New iPhone Pricing Scenarios

As we have written previously, our base case modeling for the upcoming iPhones assumes the LCD variant is $770 with expectations in the range of $700-$800. We believe the LCD will replace both the iPhone 8 ($700) and iPhone 8+ ($800) as the new mass market iPhone and will represent ~50% mix of the three new devices. Our bull case for iPhone sales would have the LCD device at $700, the OLED iPhone XS at $900 and the OLED iPhone XS Plus at $1,000. This bull case would increase our Q4 base case of 7% y/y iPhone growth to ~10%. Our bear case for iPhone pricing has the LCD at $800, the XS at $1,000 and the XS Plus at $1,200 and would represent a reduction in y/y growth to 3% from our base case of 7%.

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Premium Pricing Trap?

Between 2014 and 2018, US smartphone upgrade cycles elongated from 24 to 36 months, while premium smartphone prices increased from ~$650 to ~$1000. Interestingly, regardless of operating system, premium customers willing to hold their smartphone for three years, are on a per year basis still paying ~$325 per year. However, the difference in customer support, including software updates, customer service, and device service options, is notable between Android and iOS. While Apple continues to expand their willingness and ability to support older devices, Android device performance and support typically decline in their third year of life. Thus, while Android OEMs are increasingly matching Apple’s pricing, we do not see them matching Apple’s customer care, likely leading to different price elasticity between Android and iOS.

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Apple Increased Promotions

As we look back at 2Q18’s slightly better than expected US smartphone activations, we believe it is notable to highlight Apple’s increased Q2 promotions y/y. While carrier promotions have been stronger in general in 2018 vs 2017, we increasingly feel Apple’s 2Q18 offers were more impactful than expected. In 2017, T-Mobile and Verizon did not offer iPhone promotions at all in April and May, with only minor offers in June. However, in 2018, T-Mobile and Verizon offered up to 50% off with trade-in or BOGO with a new line across all three new iPhones throughout the quarter. While Samsung had similarly aggressive promotions, their increase was not as meaningful vs last year. We are interested to see if Apple will remain as promotive going forward in the US and risk leading consumers to expect aggressive promotions.

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Initial 4Q18 Apple iPhone Estimates

We are providing our initial 4Q18 US iPhone estimates with a key assumption for another staggered launch, with the less expensive ($770) LCD variant launching in early Nov, similar to the iPhone X last year. We believe a staggered launch supports the more expensive OLED variants (X2-$900/X2P-$1,100) in Sep and Oct and allows for distinct marketing windows for the OLED vs LCD devices. The shift to a staggered launch moves ~1.0M units from 3Q18 to 4Q18, with our initial 4Q18 US iPhone estimate of 22.8M units with both units and ASPs up ~5% y/y.

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Extending Apple iPhone Life

After the backlash from slowing older iPhones to improve battery performance, Apple’s $30 battery replacement program has allowed many non-enthusiasts to increase the life of their older iPhone. With iOS 12, Apple is once again extending the life of over 95% of its install base with performance improvements of 40-60% for many core device tasks. We wonder if Apple is trying to build a narrative for the mass market that iPhones are capable of lasting five years. Along these lines, we are also interested in monitoring what, if any, these efforts will have on legacy iPhone sales this fall. For example, the iPhone 7P, with an estimated $570 price, a more nimble iOS 12 and dual cameras, could be more attractive vs Apple’s previous n-2 predecessors. While its outdated look may limit sales, it could prove a strong alternative to the $400-$500 Android devices many carriers are interested in promoting.

BayStreet Research Postpaid Wholesale Prices

Waiting on the Mid-Tier

Expectations are increasing for mid-tier ($300-$500 wholesale) postpaid smartphone sales. From a carrier perspective, growing mid-tier sales, at the expense of premium ($500-$1000), reduces costs while potentially providing the same level of customer satisfaction and data usage. However, in the current environment of smartphone lifecycle elongation, we struggle with the idea of premium customers downgrading to lower-tier devices. We believe premium consumers are more likely to hold on to their device longer and eventually purchase another premium device offering more “future proofing,” and the ability to once again hold on to the device longer. However, we are more optimistic about low-end consumers “moving up” to the mid-tier, but given a much smaller base of low-end postpaid customers, we believe mid-tier growth is likely to be mild.

Motorola Forecast

Motorola Well Positioned?

Motorola had a difficult 2017 as they transitioned from Verizon exclusivity to low-end and premium devices across most carriers. While their premium devices struggled in 2017, the low-end E4 was a surprise hit at MetroPCS and Sprint. Given ZTE’s recent issues and increasing carrier attention on the lower tiers as mentioned above, we believe Motorola will build on last year’s low-end success in the 2H18. With Motorola devices likely replacing the successful Revvl & Revvl Plus at T-Mobile, and expectation for a more substantial role at Sprint, we believe Motorola could be well positioned to gain share.

BayStreet Research 2Q18E

Looming Q2 Weakness

1Q18’s relatively healthy smartphone activations benefited from an earlier Samsung Galaxy S9 launch y/y and a full Q of iPhone X sales. With less aggressive promotions, an elongating upgrade cycle and limited device launches, we are tracking 2Q18 postpaid sales down ~8% y/y and the total market down ~6%.

Samsung Note 8

Samsung Note 8 Cannibalization

April Samsung Note 8 volumes were down 70-80% from pre Samsung Galaxy S9 launch levels. We believe the minimal differentiation between the Samsung Galaxy S9+ and Samsung Note 8 (S-Pen only) have driven the slightly less expensive Samsung Galaxy S9+ to considerably cannibalize the Samsung Note 8. This compares to Samsung Note 5 cannibalization of 50-60% from the Samsung Galaxy S7s.

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Apple's Fall Lineup

With our initial 3Q18 forecasts, we estimate the cheaper ($700) LCD variant will make up ~50% of flagship sales vs the iPhone X2 (~20%/$900) and X2P (~30%/$1,100). Combined with the existing higher ASP portfolio, we forecast Apple’s 3Q18 US ASPs up 18% y/y to ~$780 from ~$670.

Samsung GS9

Samsung Galaxy S9 Woes

Initial Samsung Galaxy S9 sales are underperforming vs the Samsung Galaxy S8, due in part to ten fewer days of preorder, more aggressive Apple promotions y/y and the Samsung Note 8 in the line up vs last year’s Note absence. After adjusting for the Note 8, total premium sales are still down ~25% y/y since launch. We estimate the more aggressive iPhone promotions attributed for up to half of the y/y premium decline. Although we expect Samsung to increase marketing and promotions in April and May, we doubt it will materially change the GS9 trajectory. With the lowest pricing across national carriers, T-Mobile is declining the least, and AT&T, with its larger iPhone base and continued focus on new subscribers vs upgrades, is declining the most.


Increasing Signs of Price Elasticity

As consumer awareness of smartphone pricing has grown, we increasingly see signs of price elasticity. Our first indication was with the iPhone X in 4Q17, where non-enthusiasts were unwilling even to entertain the thought of a $1,000 smartphone. With the GS9 launch, we hear the combination of increased price, coupled with only mild innovation, is limiting upgrades. However, one of the more surprising signs of elasticity is T-Mobile’s outperformance vs the other national carriers with only a slight $80 discount on the full price of the GS9. Interestingly, the $80 discount, which allows the base variant to avoid a down payment, is also driving a higher mix of base variant sales at T-Mobile vs the other carriers.

Samsung GS9

Samsung's GS9 Weakness

Similar to Apple’s 4Q17 weakness, GS9 sales appear limited by a shift in carrier promotional focus, EIP’s elongation of the upgrade cycle beyond two-years and mild cumulative product innovation. We are tracking GS9 national carrier preorders down 35-40% vs the GS8 and are therefore lowering our GS9 unit forecasts from down 5-10% to down 15-20% vs the GS8 through June. Demand at T-Mobile is stronger than the other national carriers, due in part to a lower price for the GS9 ($720), allowing the smaller variant to avoid a down payment. While launch day (3/16) promotions for the GS9 can still improve trends beyond our forecast, our initial view of the GS9s benefiting from upgrading a large GS7 base is now more than outweighed by weak US smartphone trends.


Harvesting Enthusiast’s Demand

As the realities of the slowing US smartphone market continue, we think it is important to highlight the benefit of increasing ASPs for Samsung & Apple. The $1,000 iPhone X showed the willingness of enthusiasts to pay a considerable premium for the latest technology. While the iPhone X failed to appeal to the mass market, Apple’s iPhone 8P benefited as a cheaper alternative (amongst other device-specific reasons we’ve discussed) and helped drive Apple’s 4Q17 US ASPs up ~18% y/y, more than offsetting single digit y/y unit declines. For Samsung, the return of the Note 8 to its lineup along with mild price increases of ~5% for the GS9s y/y is driving 1Q18 ASPs up ~15% y/y. Unfortunately, as highlighted above, the GS9’s expected unit weakness could more than offset ASP improvements. Either way, it appears for the premium OEMs, the ability to harvest enthusiast demand for the latest technology provides an important offset to a slowing market.

Equipment Installment Plan

The Other Side of Equipment Installment Plans (EIP)

EIP’s shift to 24 monthly payments, with trade-in, has not only increased premium device sales in the US, but also consumer awareness of the value of their smartphone. Previously mass-market consumers thought their smartphone was worth ~$200 and practically worthless after two years. We understood EIP would elongate upgrade cycles, as consumers’ monthly bills decreased on the 25th month. However, as we exit 4Q17 and the three-year anniversary of EIP, carrier reported upgrades indicate a significantly broader base of customers are willing to hold their devices for more than three years. We believe the lack of “must-have” innovation in the latest iPhones has led to the harsh reality that, for a considerable portion of Apple’s base, the cost savings of holding an iPhone 6 for the fourth year was more appealing than the incremental cost and utility of a newer device.

T-Mobile and Sprint

New Carrier Realities

While AT&T and Sprint performed in the vicinity of our expectations in 4Q17, reporting increasing upgrade rates y/y, Verizon and T-Mobile, arguably the two carriers with the most momentum entering the quarter, vastly underperformed. Verizon’s larger base of pragmatic and non-tech enthusiast subscribers proved more willing than our most pessimistic expectations to delay upgrading their device. T-Mobile underperformance was likely driven by their introduction of a down payment for device financing over $720. Combined with weaker promotion y/y and the impacts of EIP mentioned above, smartphone upgrade rates are likely to continue to decrease in 2018, as carriers focus on profitability over market share and M&A.

Apple iPhone X

Lowering 1H18 iPhone X Expectations

While our overall iPhone estimates for the 1H18 remain unchanged, we are reducing iPhone X mix due to a weaker than expected sales increase from a fully supplied iPhone X in mid-December. In late Dec, we tracked stronger than expected sales of the discounted (BOGO) iPhone 8/8P and iPhone 7/7P. We surprisingly found slight iPhone 8/8P supply constraints across carriers and indications of mass market consumers’ lack of appreciation for the iPhone X’s distinguishing features. We believe the BOGO iPhone 8/8P promos likely exacerbated the only mildly promoted iPhone X weakness, but none the less view the fully supplied iPhone X’s lack of increased traction as a sign its form factor and $1,000+ price could be a harder sell with non-enthusiast buyers in the 1H18. We feel Apple is primarily competing with itself, and believe its loyal consumers are satisfied choosing between the different iPhone price points and see little sign of Android competition slowing iPhone sales.

Google Pixel 2

Improved Pixel 2 Traction

Google and Verizon considerably improved weak Pixel 2 momentum in December, helped by an aggressive $300 discount and improved sales rep enthusiasm for the devices as Apple and Samsung flagship alternatives. We have heard Google “pulled all the right levers” to get the Pixel 2s better positioned with Verizon store reps. We believe this ranged from the aggressive discounts, improved marketing, sales rep sales contests and requirements for all sales reps and store managers to carry the devices. We view the increased traction as a considerable accomplishment and are interested to see how and if the momentum can continue going forward. We still believe the Pixel 2s are down slightly y/y vs the original Pixels.

iPhone Three Generations

The New Apple Era

As Apple’s iPhone base matures and users purchase their second or third iPhone, we are seeing a shift in carrier core store customer make-up. The iPhone enthusiasts increasingly buy their devices online, either from their carrier or Apple directly, leaving the carrier store walk-in customer to be made up of more non-enthusiast iPhone buyers. These customers are much more likely to purchase an iPhone 8 or older iPhone. With the iPhone X unavailable at retail in November, carrier sales reps were surprisingly successful selling the iPhone 8/8P, and the now relatively inexpensive iPhone 7/7P, as Apple loyalty limits the consideration of Android alternatives. With iPhone X supply expected to improve considerably by mid-December, we are interested to see how non-enthusiasts embrace the $1,000 iPhone X.


Huawei US Entrance

As we look into 2018, we are intrigued by the entrance of Huawei in the US and especially how they will approach the premium and low-end markets. We believe they have both premium and low-end devices coming to AT&T in 1Q18 and are working with Verizon to potentially bring a premium device in the 2H18. With their surprising success penetrating W. Europe in 2H15 and having established themselves as the clear #3 to Samsung and Apple by 2016, we respect their ability to penetrate a mature market with little to no brand awareness. However, with the recent lack of success of other new premium Android players, we could easily see Huawei struggle, especially at an Apple dominated AT&T. Either way, with Huawei having spent years trying to enter the US market, Android competition is showing no signs of weakening in 2018.

Apple iPhone Triplets

The iPhone Snowball

The delayed iPhone X has created a challenge in comparing y/y sales trends. We believe the iPhone 8/8P sold better than expected and were only down ~30% in Sep and Oct versus last year’s iPhone 7/7P. Our research has been tracking better than expected initial supply of the X, with activations in-line to slightly behind Sep’s iPhone 8/8P sales. Thus, in early Nov, combined iPhone 8/8P and X flagship sales are currently trending up ~35% y/y versus the 7/7P. Should these flagship trends continue, in addition to legacy device strength (iPhone 7, 6, SE) across post and prepaid, our 4Q17 y/y growth forecast could prove conservative.

Google Pixel 2

Pixel Weakness

Last year's Pixel success was impressive for a new entrant, driven by quality devices with excellent marketing and unique services. However, the first Pixels benefited from a weaker competitive environment, including the lack of the Note 7 and a mild iPhone 7 refresh in 4Q16. This year is proving more difficult due to the relatively modest Pixel 2 hardware refresh, which lack the thin bezels of the Note 8 and iPhone X, and limited incremental software and service innovation. Moreover, it appears last year’s Pixels will be discontinued shortly, removing a potential growth driver. When combined with early concerns regarding screen quality, it seems the Pixel lineup is in for a tough year.

Apple iPhone 8 / 8P

iPhone 8/8P Perspective

Our initial impression of the iPhone 8s was underwhelming, especially when compared to the iPhone X, and we were therefore not surprised to see 8/8P preorder volume down ~60% y/y across carriers. Consumers that pre-order iPhones are much more likely to preorder the iPhone X. However, Sep iPhone 8/8P sales are only tracking down ~30% versus a more heavily promoted 7/7P. Interestingly, with full availability of both the iPhone 8s this year, we are tracking a meaningful increase in plus variant mix in Sep from ~33% for the 7P to ~55% for the 8P.

Motorola Z2 Force

Motorola Case Study

When we learned Motorola had successfully ranged their Z2 Force across the big four postpaid carriers, we were impressed with their initial offer of an unbreakable screen flagship, a free $300 projector mod, carrier BOGO promos and plans for a $200M+ US marketing campaign. With an established US brand, we believed Motorola could become a flagship alternative to LG, and possibly Samsung users. However, the early Aug launch was hampered by limited supply and marketing. The eventual marketing push proved confusing and featured ads reminiscent of the Motorola RAZR brand. With less than 40k total sales at AT&T, Sprint and T-Mobile combined, the Motorola Z2 Force is a case study in how high Apple and Samsung have set the bar in the US smartphone market.

Apple iPhone Triplets

Apple's First Triplets

This fall Apple is expected to launch its first three flagship portfolio, the iPhone 7S, 7SP and iPhone 10th anniversary. Historically, we have found within triplet portfolios the middle device struggles due to consumer’s tendency to splurge for the most premium device or rationalize saving money with the least expensive. However, it is unclear how a $1,000+ price point and severe supply constraints for the most premium device will impact this dynamic. We are certainly very interested to see how Apple will segment the triplets with features and price, and would not be surprised to see the 7SP struggle.

Apple iPhone X

Can a $1,200 iPhone Sell?

We are assuming Apple releases the iPhone 7S ($650), 7SP ($770) and iPhone X ($1200) this fall. With installment pricing, and depending on memory variant, the 7S would be $27-$35/month, the 7SP $32- $40/month, and the iPhone X $50-$55/month. Although $1,200 is a substantial leap, we believe it could be palatable for two key reasons. First, installment pricing has supported higher flagship pricing over time, with consumers increasingly choosing the most expensive variant within a line-up. Second, trade-in promos during launch and in Q4 could reduce the price of the iPhone X to ~$30/month. Although the 7S and 7SP would decrease in price to ~$7-$11/month, we believe if the iPhone X offers truly unique and innovative features, it could disproportionately benefit from discounting because of consumer desire for future proofing and a willingness to splurge for the latest smartphone status symbol.

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Bring on the Noise

This Fall is shaping up to be one of the more competitive marketing landscapes we have seen. Apple is sure to be aggressive with its 10th anniversary iPhone and unique augmented reality offering. Samsung will need to spend aggressively to increase awareness for its Note 8, which is launching simultaneously with the iPhones this year. A key driver for Pixel success last year was Google’s massive marketing campaign, which we expect again with the October launch of the Pixel 2. Motorola will launch its flagship Z2 Force across all carriers later this month, and we hear of a $200+ million campaign. Aside from devices with big money behind them, the upcoming Essential Phone at Sprint and Google’s first Tango device by ASUS at Verizon will also fight for our attention. So, bring on the noise, we will have our popcorn ready!

Samsung Note8

Samsung Galaxy Note 8

Despite previous reports of an early Samsung Galaxy Note 8 launch, we are tracking a delayed mid-Sep launch, essentially in-line with the 10th anniversary iPhones. We have been positive on the Samsung Note 8's opportunity to not only capitalize on pent-up demand from a unique and loyal customer base but also benefit from improvements over the current Samsung Galaxy S8s, including dual cameras and a fully functional Bixby voice assistant. However, with Apple sure to dominate press coverage and secure exclusive carrier window signage and website landing pages, the Samsung Note 8 will lack the ~two weeks of exclusive carrier support its predecessor received last year. Thus, while certainly not disastrous for Samsung, we are lowering our expectations and no longer believe the Samsung Note 8 can improve upon the weaker y/y GS8 trends thus far.

Virgin Inner Circle

Virgin Inner Circle

irgin recently announced an “Inner Circle” online iPhone offer, including an iPhone SE 32GB for $280 or iPhone 6 32GB for $320, with a year of unlimited voice, text, and data for $1 without a contract. With $120 savings on the iPhone SE and $600 of free services, customers are essentially making money, giving the clear impression Sprint is focusing on short-term results. We believe Virgin sells ~300k smartphones a quarter with 30% (or ~100k) sold online and the remainder through national retail. While our most optimistic forecast is for only 100-300k incremental iPhones sales through Q3, the dynamics we are closely tracking are consumer awareness, and more importantly, carrier competitive response, which does create the potential for meaningful iPhone sales.

Apple Postpaid Growth

Apple Sep Q Forecast Changes

With the increasing likelihood of a delayed launch of the OLED variant of the three iPhones launching this fall, we have adjusted our 2H17 forecast. Consequently, we now believe Q3 US iPhone sales will decline ~10% y/y, with ~40% of new flagship sales pushed into Q4. Read More

Asus Zenfone AR

AR Race Over Before it Starts?

Google’s second Project Tango device, the ASUS ZenFone AR, is slated to launch exclusively on Verizon in late June. We expect Verizon to place considerable promotional focus on this powerful device, which includes a 23 MP camera, 2 additional cameras, up to 8GB RAM (World’s 1st) and Daydream VR support. We forecast ~150k sales for the ZenFone AR at Verizon through the end of the year and believe developer interest will slowly increase along with device sales. However, Apple’s surprise announcement of ARKit supporting all legacy devices with an A9 chip (iPhone SE, 6S and higher / iPad 2017, iPad Pros) immediately expands the developer opportunity from tens of thousands to hundreds of millions. We estimate ~90M A9 devices in the US at the end of 1Q17. So, while Apple’s ARKit likely lags Project Tango’s depth, we believe Apple’s massive installed base of supported devices, including tablets, which Tango currently lacks, and likely expanded functionality with the 10th anniversary iPhone launch, puts Apple firmly in the AR platform driver seat.

Samsung GS8

Samsung GS8 Promotional Weakness

While we were expecting slightly more aggressive GS8 promotions y/y, T-Mobile preferred to remain on the sidelines, allowing AT&T & Verizon to offer relatively weaker GS8 launch promotions vs last year. Last year, all carriers quickly matched T-Mobile's aggressive BOGO offer at launch. This year, only Sprint offered an aggressive BOGO lease offer at launch, as AT&T’s BOGO requires home TV service and Verizon’s GS8 discount promo has a variety of requirements. Subsequently, we are tracking Sprint up the most y/y vs the GS7 at ~30%+. AT&T and VZ are essentially flat and T-Mobile down the most at ~15%. Overall we have the GS8 flat y/y through April, and while we expect increased promotional focus in Q2, we would not be surprised to see the GS8 down 10%+ vs the GS7 through the end of Q3.

Android Competition

Android Competition Heating Up

While Motorola’s presence in the US has been limited to Verizon the last few years, the OEM is on track to launch across carriers in the 2H17. In addition, Nokia (HMD) is potentially entering the market and we expect ZTE to continue to grow its business across carriers. TCL is also on the verge of entering T-Mobile with a white labeled device. With LG the primary Android alternative to Samsung at most carriers, we could see LG’s struggles worsen considerably in the coming months.

Red iPhones

Red Apple iPhones

While the unexpected late March release of red iPhones was interestingly timed near Android flagship announcements, the impact on iPhone sell-thru has been minimal thus far. Initial checks indicate a general lack of awareness among consumers, with sales predominately to customers already intent on buying an iPhone. Although AT&T, Sprint and Verizon appear to have received healthy initial supply, availability at T-Mobile has been scarce, with most stores having yet to receive an initial shipment. While we do not anticipate a material impact on overall iPhone sales in the June Q, the ability for sales reps to mention a recently launched iPhone SKU will certainly not hurt.

Samsung Galaxy S Sales by Generation

Latest Galaxy S8 Thoughts

We have written previously of the difficult comps the GS8s will have to the GS7s.... Combined with constant rumors of an upcoming 10th anniversary iPhone, Samsung's most important smartphone launch is happening in its most difficult launch environment ever.... Read More

ZTE Poised to Expand US Presence?

With today's news of ZTE settling with the DOJ, ZTE could have removed its last major obstacle to a larger US presence. ZTE has been in the US market for ~5 years and has slowly grown into the clear #3 prepaid smartphone vendor behind LG and Samsung with quarterly volumes of ~1.5M. Postpaid trends have been smaller and mostly limited to T-Mobile, but ZTE has recently benefitted from the successful ZMax Pro launch. The device's high-quality specs and low price have made it a low-end hit at T-Mobile. Interestingly, ZTE is currently in all the national prepaid carriers (except Verizon’s) and with the DOJ issues behind them, has the history and relationships to expand into postpaid.

AT&T's Changing Focus?

AT&T appears much less focused on competing for smartphone subscribers compared to the past ~10 years. Previously, AT&T would promote its broad portfolio of devices and was quick to match the other carriers’ promotions. Today, AT&T's smartphone portfolio has shrunk to 18 SKUs from 32 in 2015 and recent promos require adding home TV service. Conversely, Verizon has brought in Google’s Pixels and continues to promote a differentiated Motorola line up. Except for AT&T, all carriers continue to cycle traditional device promos, such as BOGOs, bundles, and discounts. AT&T's new approach appears to assume consumers will buy either an iPhone or Samsung flagship, with reps instead focused on selling consumers a differentiated portfolio of services, not devices.

Verizon Raises the Bar

While T-Mobile has certainly been the most promotive carrier over the last few years, Verizon has responded in multiple ways in the back half of 2016. Beginning in July, Verizon launched its first free smartphone offer, addressing a previously ignored low-end segment. Verizon then raised the bar over the holidays as we tracked, in addition to a broad portfolio of free low-end phones, staggered one to two-day flagship promotions for half off ($400) and even free iPhone 7s, GS7s and Pixels with trade in. Interestingly these flagship promotions were not broadly communicated and only available for a very limited time. It appears when combined with Verizon's exclusive on the Google Pixel, a device well aligned with T-Mobile's younger tech-savvy customer base, that Verizon is determined to slow T-Mobile.

Looking Ahead to the Samsung Galaxy S8

As we evaluate the opportunity for the GS8, our initial thoughts go to the difficult comps set by GS7 BOGO promotions at launch. These unprecedented promotions allowed the GS7s to gain virtually all high-end Android share available from LG and HTC and cannibalize nearly all legacy GS6 sales. With such a difficult comp, combined with Samsung's historic inability to gain meaningful share from Apple, we are expecting only low single digit growth y/y for the GS8's. Ironically, this growth is driven in large part by the lack of the Note 7 in the portfolio. We are also very interested to see if discounted GS7s can lead to the return of meaningful legacy device sales in 2Q17.

Google Pixel Outperforms

Verizon’s sales force is one of the industry’s most influential and thus when we tracked weak Pixel preorders and general lack of sales rep enthusiasm, we were concerned. However, we have seen an abrupt change in attitude, with reps now enthusiastically recommending the Pixel, especially for Note 7 switchers. Interestingly, the main selling points have been the Pixel's "pure" Android experience, lack of carrier bloatware and unlimited cloud storage with virtually zero mention of Google’s Assistant. Assuming Google & HTC can improve supply in Q4, we can now easily see these devices taking share from Samsung and eventually supplanting Motorola as the #2 Android OEM at VZ.

Samsung Note 7 Update

As we highlighted last month, we are tracking the impact of the Note 7 recall along two key variables. 1) Samsung loyalty and 2) willingness to leave Android. Our October trends highlighted slightly weaker Samsung loyalty with our base case now slightly lower at ˜65% versus 70% last month. However, within the ˜35% leaving Samsung, willingness to leave Android has been much higher than expected with an overwhelming majority (80%+) choosing iOS. We believe this supports the view of Note customers preferring premium brand/status over the Android ecosystem. While this is a mild positive of Apple, our estimates for iPhone sales from Note 7 switchers only increases by 300k in 4Q16 to 550k.

Google Pixel

Last week’s Pixel announcement is intriguing from many perspectives, including the choice of an exclusive carrier, the potential for Pixel-only Google services and Google’s renewed effort to sell devices direct to consumers. Longer term, we believe the Pixel offers an important hedge to Samsung’s premium Android dominance and provides Google an excellent opportunity to innovate on an unfragmented platform, much like Apple. However, in the near term, we are not yet convinced the Pixels differentiate themselves enough from Apple and Samsung’s current flagships. Furthermore, with Motorola also selling exclusive flagship devices at Verizon, the first generation Pixels’ road to success will be far from easy.

Samsung Note 7 Beneficiaries

With Samsung ending Note 7 sales, we believe understanding the impact lies within two key variables. The first is the percentage of customers likely to remain loyal to Samsung. We believe the vast majority (70%) will remain with Samsung and likely choose a Galaxy S7 device alternative. The second, and more difficult variable, is what percentage of switchers are willing to leave the Android ecosystem. Note customers are aspirational and value premium brands, and thus the iPhone could certainly appeal to them. However, Note customers are also among Samsung's most loyal. Our base case assumes roughly half of switchers (or 15% of total) will choose an iOS device, which equates to only a 200-300k increase to 4Q16 iPhone sales.

Samsung Note 7 Aftermath

Smartphone recalls are rare and we have never seen one in our 15 years of market coverage. Samsung appears to be handling the recall extremely well and could have most, if not all, of the defective units replaced by the end of September. While we believe potential Note 7 buyers will be mostly channeled into a GS7 or GS7 Edge, the prime beneficiaries outside of Samsung will likely be the iPhone 7 Plus and, to a lesser extent, the LG V20. We are very interested in monitoring how long consumer and carrier sales reps’ memories are regarding this unfortunate situation.

The Return of the Free Phone and Verizon’s New Value Focus

In July, T-Mobile began offering free (after 24 monthly credits) low-end Samsung (On5 & J7) and LG (K7 & K10) devices with $65/6GB and higher rate plans. These promotions were certainly successful, with the On5 quickly going on backorder. Verizon was the first carrier to respond, and in late Jul offered a free Samsung J3v (after 24 monthly credits) with a $55/2GB data plan. While T-Mobile has consistently and successfully focused on the low-end smartphone market, Verizon has rarely offered such aggressive low-end promotions, and has consistently been the last carrier to pursue these consumers. We are interested to see if Verizon remains committed to this segment, and whether AT&T and Sprint follow with free low-end device offers.

Pokémon Go Impact

We have received a number of inquiries about the impact of Pokémon GO on US smartphone sales. While high-end devices as old as the Samsung GS4, LG G3 and iPhone 5 have the power and gyroscope to run the AR functionality of the game, we are not seeing any noticeable change in the run rates of premium devices. Should the phenomenon continue, we would expect the first impact to be a mix shift from ultra-low-end devices that lack the minimum requirements to run the game, to low-end devices like the Samsung J3 and LG K7 that can run the game, but without the AR functionality.

Connected Apple Watch Impact

The more we analyze the eventual impact of a connected Apple Watch, the more we realize this, like installment pricing and a maturing smartphone market, will likely lengthen the iPhone upgrade cycle. The more screens a user has to access their digital lives, the less role any one device plays. Much like how smartphones and tablets have elongated the PC upgrade cycle, the connected Apple Watch will likely elongate the iPhone upgrade cycle as it takes over many of the roles that were previously exclusive to the smartphone.

Apple iPhone Upgrade Model

Using our monthly US iPhone sales data, we modeled upgrades as a percent of sales for upgrade cohorts of 12, 24, 36 and 48 months for each SKU. Assuming the weighted average upgrade for each SKU increased from ˜22 months in 2007 to ˜28 months in 2015, upgrades as a percent of sales increased from 68% in 4Q14 to 72% in 4Q15. If we assume 75% of 4Q16 sales are upgrades, only 33% of 4Q14 iPhone 6 buyers need to upgrade to achieve flat US iPhone sales y/y.

Apple and Samsung Control 91% of the US Postpaid Smartphone Market

Over the past eight quarters, smartphone manufacturers Apple and Samsung have increased their combined market share of the U.S postpaid smartphone market from 82% to 91%. During this same time, manufacturers such as LG, Motorola, HTC, and others have seen their combined share reduced by half from 18% in Q2 of 2014 to 9% in Q2 of 2016, according to the latest BayStreet Research estimates ending May 31st.

To make matters worse, the market for postpaid smartphones continues to contract and is on pace to decline 9.4% year over year in Q2 to roughly 20 million units. The combined effect of Apple and Samsung’s share gains and the shrinking market will result in only 1.7M total postpaid smartphones sold by other OEMS in Q2 of 2016, compared to 2.7M in the same quarter last year, a 37% decline.
Cliff Maldonado, Founder and Principal Analyst at BayStreet Research, comments: "The combination of a maturing U.S. postpaid smartphone market and aggressive Apple and Samsung "buy one, get one free" promotions in the last few months has created a bleak environment for the other Android smartphone manufacturers. The premium smartphone market has fewer and fewer alternatives to Apple and Samsung and we don’t see this changing anytime soon." Read More

Apple Not Losing Share

Despite unprecedented promotions, an award winning GS7/GS7E and a relatively underwhelming iPhone 6S, Samsung has gained only slight share from Apple in 1H16 in the US. The vast majority of GS7 gains have come from fellow Android OEMs, LG and HTC. The difficulty of getting iPhone customers to switch in large numbers has only grown clearer this year and it appears Samsung’s remaining high margin growth will likely come from gaining virtually 100% premium Android share.

Promo Fatigue

Despite the carriers continually one upping themselves with ever more aggressive promotions (VZ’s latest is a free 50" Samsung Smart TV with 2 line activation), the overall smartphone market remains weak and has not increased in-line with the level of increased promotion. These aggressive promos are mostly driving share shifts between the OEMs and increasing sales of flagship devices at the expense of legacy flagships and mid to low-end Android devices. It will be interesting to see if the higher level of promotion activity continues into the iPhone 7 launch and how, if at all, Apple benefits. We certainly expect to see higher promotional activity y/y.

Running Out of Room

The combination of a maturing US postpaid smartphone market and aggressive Samsung BOGO promotions in March has created a bleak environment for the other Android OEMs. In 2Q15, Apple and Samsung controlled ˜85% of the US postpaid market, leaving roughly 2.8M units for the other Android OEMs. As we enter 2Q16, we estimate Apple and Samsung will control ˜90% of the postpaid market, leaving ˜30% less or 1.9M units for the remaining Android OEMs to address.

Samsung Simplifies

In early Sep 2015 (Data Walk Vol. 147), we wrote that Samsung’s 2015 GS6/Note 5 portfolio was confusing and lacked a pricing structure in line with what consumers value. Samsung’s 2016 portfolio is much cleaner, offering the flagship GS7 and, for an extra $100, a larger screen GS7 with curved display. No longer is Samsung charging a premium solely for a curved display. We believe the Note 6 launch will come in at a $100 premium to the GS7 Edge, offering an even larger screen and stylus. While BOGO and free VR headset promotions certainly drove unexpected strength in Q1, Samsung deserves credit for streamlining their portfolio and pricing. With rumors of more than two devices launching in Sep and an already large portfolio, we are concerned Apple may be poised to repeat Samsung’s 2015 miscues.

Samsung GS7 Cannibalization

While the initial success of the GS7 has outperformed our most optimistic expectations, it is important to note that Samsung’s legacy flagship portfolio (Note 5, GS6, GS6E and GS6E+) has slowed more than expected. This is partially due to the lack of price reduction on Samsung’s GS6, which occurred unusually early (Aug 15) in its lifespan. Consequently, the legacy flagship portfolio has declined 60%+ m/m vs last year’s ˜40%. Overall, Samsung’s flagship portfolio is still up a very healthy ˜25% y/y.

Upcoming Apple Event

As we’ve highlighted previously, Apple is set to launch a refreshed iPhone 5S later this month. In our opinion, the key to the announcement is whether or not the current 5S stays in the line-up and at what price. If the 5S is discontinued, we see only a minor benefit for US iPhone sales and would expect a normal low single digit sequential decline in the June Q. However, if the iPhone 5S remains in the portfolio at $350, or as rumored at $250, we could easily see sequential growth in the June Q. It is important to note that we have been tracking the iPhone 5S at $250 (before subsidy) at Cricket, where it has sold well for its price tier.

March Launch Bonanza

Traditionally, Q1 is a quiet period for US smartphone launches and promotions. Carriers often clear inventory in anticipation of Android flagship launches in April & May. This year is shaping up as quite a bit different with Apple, Samsung and LG all on tap to launch devices in March. Last year’s Apple Watch coverage certainly disrupted Samsung’s GS6 launch buzz and this year could be similar, as Samsung deals with iPhone 5SE coverage and the launch of LG’s G5. Interestingly, HTC could benefit from launching its M10 later in Q2.

Key Differences for the Apple iPhone 6S Cycle

When we compare Apple’s prospects for its 6S cycle versus the 5S cycle, we highlight four key differences in the US. First, carrier promotions are much more aggressive than under the subsidy model two years ago. Consumers can now easily upgrade out of cycle at a much lower upfront cost with carriers willing to reimburse termination fees when switching carriers. Second, the perceived innovation from the 4S to 5S was much smaller than it is from the 5S to large screen 6S. Third, Apple’s portfolio is considerably larger now with 5 SKUs versus only 3 for the 5S cycle, allowing Apple to gain share at lower price points. Finally, Apple’s key Android competition is weaker now. Samsung’s GS6 missed the mark on differentiation vs the iPhone and has ceded share to Apple throughout 2015. So while the market is certainly slowing, Apple is in a position to continue to gain share and grow y/y.