Will The iPhone 8 Upgrade Cycle Be Bigger Than The iPhone 6?

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Apple (NASDAQ:AAPL) is expected to launch its 10th anniversary iPhone, presumably called the iPhone 8, this fall. Apple’s stock has rallied by close to 23% year-to-date, as investors hope that the device, which is expected to sport Apple’s first design refresh in three years, will drive a super upgrade cycle of sorts for the company. The 2014 iPhone 6 – Apple’s first large screen phone – set the benchmark for the company as far as upgrade cycles go, with iPhone shipments rising by about 37% year-over-year during FY’15, marking an increasing of 62 million units. In comparison, sales rose by around 20% during the iPhone 5 cycle, and declined by 8% during the iPhone 6S cycle. So, will the iPhone 8 outdo the iPhone 6? Below we take a look some of the factors that could influence the device’s sales.

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Opportunities: Pent Up Demand, Large Installed Base

Apple has proven that its iPhone base is very sticky on account of its hardware and software ecosystem, and it’s safe to assume that much of the iPhone 8’s demand will be driven by existing users. Bernstein estimates that the iPhone’s installed base is likely to stand at close to 800 million at the end of FY 2017. This is roughly 80% larger than the iPhone user base at the beginning of the iPhone 6 cycle. Moreover, according to estimates from comScore, out of the ~86 million iPhone users in the U.S., about 70 million users were on devices launched in 2015 or prior. This translates to about 82% of iPhone users in the U.S., providing Apple a large base of users to sell to. Moreover, the device is rumored to sport some innovative features such as a 3D-sensing front-facing camera and fingerprint sensor built into the screen, along with some more mainstream upgrades such as edge-to-edge OLED displays and wireless charging that Apple has refrained from offering thus far. This could given many users on other platforms reason to switch to the iPhone.

Challenges: Higher Price Point, Competition Is Getting Stronger

That said, the device could face some challenges. Growth in the smartphone market has slowed (~4.2% growth projected for 2017) and upgrade cycles are getting longer. While this is partly due to the market’s maturity, recent moves by U.S. carriers to largely do away with the device subsidy model – which enticed consumers to upgrade every two years – is also likely to change the dynamics in the U.S smartphone industry. Moreover, iPhone 8 is expected to be priced at a premium (some estimates put the starting price at ~$1,000) and this could potentially limit demand compared to the iPhone 6, which started at $650.

Competition is also mounting. While Apple was perceived as a trendsetter in the smartphone business, with its Android rivals typically following its lead, there has been a lot of innovation in the Android space over the past few years and Apple will have to play catch up in many departments with the iPhone 8.  For instance, Samsung’s new Galaxy S8 appears to have set the design template for the next generation of smartphones, with its compact form factor and bezel-free display. Meanwhile, Google’s well-received Pixel handsets have been offering a cleaner and more intuitive version of the Android software, with cameras that are rated among the best in the industry.

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