Another looming 5G challenge: Getting customers to upgrade to a 5G phone

Handset upgrade rates are falling. (556 Ventures)

All four nationwide wireless carriers are promising to deliver mobile 5G, and while they tout the consumer benefits of superfast, low latency networks, the biggest beneficiaries of 5G could be the carriers themselves. Moving customers onto the more efficient 5G network technology will allow carriers to handle more data traffic, but they won't realize this benefit until significant numbers of their customers upgrade to 5G-capable phones. That could take quite a while because smartphone users are not upgrading like they used to.

"I don't believe we're going to go back to the historic upgrade rates," AT&T CFO John Stephens said during the company's most recent earnings call. "I think those are clearly a matter of history. ... The fact that we're talking about 4.3% being a big increase in the upgrade rate gives you the sense. ... We used to talk about normal upgrade rates being a lot higher percentages."

Verizon's upgrade rate was slightly higher at 5.0% for the carrier's retail post-paid customers, but like AT&T, Verizon noted that the upgrade rate is trending lower. 

Will 5G change that trend? Analysts are skeptical. 

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"Consumers are not upgrading their phones because we have reached saturation both in smartphone adoption and in smartphone features," said analyst John Feland of Argus Insights. "Upgrading disrupts our lives, as we transfer over gigabytes of information between handsets, get used to new UI features, etc." Feland doesn't see 5G changing this trajectory.

"Most consumers, when using bandwidth-heavy apps like Netflix or Fortnite, are using Wi-Fi networks, not cellular networks, to enable those experiences.  And since 5G is likely to be deployed in Wi-Fi heavy urban markets first, consumers will not see the need in the near term," Feland said.

Analyst Bill Ho of 556 Ventures believes carriers may use targeted promotional campaigns to try to move some of their best customers to 5G-capable phones.

"Some carriers may be proactive in targeting people with older handsets that are high-value clients," Ho said. "A handset is a handset but with new spectrum bands being introduced they want people in those new spectrum bands." 

Ho said operators may also have an opportunity to upgrade enterprise customers to 5G-capable phones. He believes a significant portion of those customers are still on subsidized pricing plans. Those plans bury the cost of new devices in the monthly service fees, so upgrading seems less expensive and companies can treat those costs as operating expenses.

Of course, smartphone branding may also play into user decisions around upgrades next year, as operators start to turn up mobile 5G networks in select parts of the country. Right now Samsung and Huawei are more vocal about 5G than Apple, so it's possible that iPhone users will have to choose between switching to Android or waiting longer for 5G.