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How Will EIPs Change Handset-Replacement Cycle?

NEW YORK – Some wireless analysts expect equipment installment plans (EIPs) for unsubsidized postpaid smartphones will shorten the handset-replacement cycle from the current average of 24 months, but the gain could be offset by the growing number of prepaid users who are less wealthy and hold onto their phones longer.

Other analysts wonder whether EIPs will actually lengthen the replacement cycle, depressing newphone sales. They point out that consumers who pay off an unsubsidized phone after the typical 24-month installment term would see an immediate reduction in their monthly wireless bill if they keep their phone longer than 24 months.

Several analysts said the questions might not be answered possibly until the fourth quarter of this year or the first quarter of 2016. That period would follow the next big wave of handset launches – expected in late June through and October. That period would also coincide with the first big wave of consumers eligible to trade in their phones under an EIP.

So far, carriers haven’t shared their replacement-cycle experiences since the first EIPs launched 18 months ago, first as the sole option for TMobile subscribers and later, for the other three national carriers, as options to subsidized phones with two-year service contracts.

Todd Day, senior analyst for Frost and Sullivan, suggested the plans will accelerate the cycle. “Almost all consumers would love to have the latest device,” but if they have a two-year contract, they would have to pay the full unsubsidized price of the latest phone if they purchased before the contract expires. Now, with EIPs, consumers pay an unsubsidized price for a phone over time and trade it in for a new phone as often as every 12 months without an up-front payment, he said. These customers can afford to pay $20 to $30 per month in installment payments for the privilege of getting a new phone every year because installment plans come with monthly service-plan discounts of $15 to $25.

Although consumers do pay slightly more per month in combined EIP and service payments compared to the cost of contract-plan service, they “get the opportunity to get the latest phone without paying for it up-front” as they would under a contract plans, Day said.

EIPs will accelerate the replacement cycle because consumers will be able to take advantage more quickly of such smartphone advances as faster processors, faster LTE speeds, better screens and cameras, and the like, he said.

For carriers, the advantages are slightly higher monthly revenues per user, the opportunity to get the latest technology into users’ hands more quickly, and the opportunity to upgrade consumers to higher end phones. The latest technologies and higher end phones will encourage more data consumption because of faster downloads and uploads, he noted. EIPs will also get network-efficient technologies, such as VoLTE (Voice over LTE), into subscribers’ hands faster.

Higher monthly revenues range from $7.50/month to $22.50/month on select AT&T’s Next installment plans for specific iPhone models, he said by way of example. A 16GB iPhone 6 priced at $199 under twoyear contract would, under a 20-month EIP, cost $32.50/ month, but a $25/month service- plan discount would reduce the extra monthly cost to $7.50. A 128GB iPhone 6 Plus, which costs $499 under contract, would cost $47.50/ month for 20 months under the 20-month payment plan, but the $25 service discount would reduce the extra monthly cost to $22.50.

EIPs also reduce carrier churn rates, said Gartner principal research analyst Meike Escherich. “By offering easy installment plans with early renewal options, [carriers] have managed to achieve lower churn rates while increasing customer lifetime value and lower subsidy cost per upgrade,” she said. “AT&T has reported the quarterly churn rate under the Next plan of 0.86 percent, which is much lower than the churn rate of 1.02 percent for customers under the subsidy model.” Likewise, AT&T’s average customer life span under the subsidy model is 98 months compared with 116 months under the Next model,” she said.

The impact of EIPs on the postpaid replacement cycle, however, won’t be known for another nine to 12 months, said Frost and Sullivan’s Day.

IDC analyst Ramon Llamas agreed the industry might not begin to understand EIP’s impact on the replacement cycle until year’s end. “We’re still waiting to see how these plans play out,” he said. There is a risk that they will extend the replacement cycle because consumers will be able to reduce their monthly payments by $30 or more in some cases.

For his part, Recon Analytics analyst Roger Entner sees the rise of EIP plans incentivizing both rapid upgrades every year and delayed phone upgrades, the latter because of reduced monthly payments after a phone is paid off. On the whole, however, EIPs in 2014 were a factor helping extend the average handset-replacement cycle to 26.5 months from 22.4 months in 2013, he said.

Strategy Analytics director Neil Mawston, on the other hand, sees U.S. replacement rates today “being accelerated by postpaid-phone installment plans, but they are being decelerated by the growing number of prepaid users. The resulting balance overall is a relatively steady replacement rate.”

“If anything,” he added, “U.S. smartphone replacement rates are likely to get longer as more prepaid smartphones are bought by less-wealthy consumers with less spending power,” he said.