Apple's new strategy for fighting off Android, retaining customers

Apple is using its huge cash hoard to keep customers from defecting to Android with iaaS – iPhone as a Service.

How Apple's one-year iPhone upgrade plan could fight off Android
Credit: REUTERS/Damir Sagolj

Apple's iPhone 6s announcement last month introduced a big incentive for iPhone owners to upgrade every year. The one-year upgrade plan is really a two-year installment purchase, financed at 0% interest by Apple with the option to upgrade to a new iPhone after 12 months. There's a catch, though – another 24-month installment purchase contract comes with the upgrade.

The customer gets the newest iPhone every year, and in return Apple renews its customer for two years simply by notifying them that their new-and-improved iPhone is ready for pickup at the Apple Store. Drop off the old iPhone and sign for the new one; customers will maintain their image as early adopters with the newest, most stylish iPhone at about the same monthly price. Drop and break it? Swap the broken iPhone for $99. This new model, the "iPhone-as-a-Service" (iaaS) plan, is as fundamental a shift as Infrastructure as a Service (IaaS) was from owning computer systems or Software as a Services (SaaS) was from owning software.

It's a good deal for iPhone loyalists. An entry-level iPhone 6s costs $649 plus $129 for Apple Care, or about $32 per month. Alternatively, the iPhone can be purchased for $27 per month over a 24-month installment plan, plus $5 per month for Apple Care, a total of $32 per month. Or, for $32.45 per month, customers can get the new iPhone with Apple Care and a guaranteed upgrade in 12 months. Promising a brand new iPhone upgrade in a year with $0 down at 0% interest, Apple clearly wants customers to choose iPhone as a Service, and for very good reason.

The iPhone is an amazing example of design, engineering, and supply-chain manufacturing. However, on a generation-to-generation basis, the difference is just not always enough to convince iPhone owners to upgrade. The iPhone 6 and 6s families share physical characteristics, making them indistinguishable except for the newer iPhone's Gold and Rose Gold colors. The iPhone 6s runs apps faster, but not really fast enough to convince iPhone 6 user to upgrade without a financial incentive.

YouTube game reviewer Mad Matt TV posted two videos showing speed comparisons between the iPhone 6 Plus and the iPhone 6s Plus: one that compared the execution time of various apps, and the other that showed the time for the finger-print reader Touch-Id to unlock both devices. There's no question that in most tests the 6s Plus won, but does it matter? Is the difference even noticeable?

The chart below compares the difference in load times of the apps on the iPhone 6s Plus to the 6 Plus (difference is measured by comparing the completion times of the load times in the videos measured in hundredths of seconds). To give the response time context , the red line represents the mean visual reaction time (331 milliseconds, or about one third of a second; 331 millisecond was cited as the mean visual reaction time in a paper titled Comparison between Auditory and Visual Simple Reaction Times in Neuroscience & Medicine). Visual reaction time is the time to perceive a visual stimulus and react, which researchers generally peg at 300 to 500 milliseconds. If you want to explore this idea further, you can test your visual reaction time on this website.

100615 chart

In all but two tests, the iPhone 6s Plus was faster. More importantly, the performance differences in three tests were less than the visual reaction time, and two more were near the visual reaction time. Only three apps ran perceptively faster. Essentially, the speed and performance differences between the iPhone 6 and iPhone 6s lines are barely perceptible, meaning customers would need other incentives than performance to upgrade.

The iPhones-as-a-Service model solves two problems for Apple.

First, the annual upgrades will be frictionless for the customer and effortless for Apple.

Second, Android poses a significant threat to Apple since it reached perpetually parity with iOS with Android 4.1. Apple has a stronger brand and Android a lower price. But the one-year upgrade plan creates a significant obstacle to those who would defect from iPhone to Android. Customers on the annual upgrade plan who want an Android will have to forgo their guaranteed annual upgrade and continue to pay for and use an older iPhone until the 24-month installment contract is paid in full.

Retaining iPhone customers also creates more chances to cross-sell MacBooks, iPads, Apple Watches, apps, and iTunes content. And the iPhones traded in after one year of use could be refurbished and sold as certified used iPhones to compete with lower-cost Android smartphones.

T-Mobile and Sprint are riding Apple's coat tails with similar-sounding plans designed to steal customers from large competitors AT&T and Verizon. The difference is AT&T and Verizon are standing on the sidelines without a plan like iPhone as a Service keeping customers from defecting.

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