Analysts: Samsung, HTC and OEMs in general are losers in shift to equipment installment plans

U.S. carriers' embrace of equipment installment plans (EIPs), and consumers' newfound appetite for such plans, helps operators' bottom lines. But analysts say that as consumers hold onto their phones for longer than they used to under two-year contracts, it is likely going to cause pain for smartphone makers that had grown accustomed to consumers upgrading to new phones more often.

Some carriers are making it easier for consumers to upgrade more often. T-Mobile US (NYSE:TMUS) just introduced a new version of the "Jump!" handset upgrade program that will let customers pay off their phones in monthly installments and upgrade their smartphones up to three times every 12 months.

Yet customers who are buying their phones outright or paying off a significant chunk of their smartphones in monthly installments are being more cautious than they once were about upgrading, industry analysts say.

"When people spend $600 to $700, they are not in the mood to upgrade every year," independent wireless analyst Chetan Sharma told Bloomberg. He said that some price-conscious consumers are starting to buy new phones every 20 to 24 months instead of every 15 months when carriers subsidized phones. Moving to EIP programs lets carriers cut subsidy costs from their balance sheets and book more equipment revenue, even if they are discounting service revenue. 

Apple (NASDAQ: AAPL) has been largely immune to this phenomenon, with more of its loyal customers opting to upgrade to new iPhones sooner, but Samsung Electronics, HTC, LG Electronics and others could see their sales crimped.

Initially, some OEMs benefited from a shift to device financing as consumers opted to purchase high-end smartphones for $0 down and a monthly device payment of $20 to $25. Yet that prosperity may not last.

"The handset makers enjoyed the ride on the gravy train while it lasted; now come the lean times," Recon Analytics analyst (and FierceWireless contributor) Roger Entner told Bloomberg. Entner predicts the handset replacement cycle will increase to 28 months this year. "Manufacturers were delighted, but now the growth is slowing. Today, everyone has a smartphone and they are holding onto it longer."

Samsung said that sales in its mobile division fell 20 percent year-over-year in the first quarter. The company expects to rebound in the second quarter on the back of strong sales of its flagship Galaxy S6 and S6 Edge phones. Yet while Samsung is expected to have fared better in the second quarter than the first, its performance will likely fall short of what the market has estimated largely due to weaker than expected smartphone sales, Yonhap News reported. The South Korean news outlet noted that Counterpoint Research predicts that Samsung has likely shipped around 45 million units of the new S6 series since its release in early April, lower than an earlier forecast of 50 million units.

At HTC, finished goods inventory climbed to a record 2.35 percent of total assets at the end of last quarter, according to Bloomberg, leading some to speculate that sales of its high-end One M9 phone are not faring well. In Early June HTC cut its revenue projection for the second quarter and said it expects to report a net loss amid weaker sales for its high-end smartphones.

Representatives of Apple, Samsung and HTC declined to comment, according to Bloomberg.

Longer smartphone replacement cycles will likely cut into smartphone sales. Research firm IDC expects shipments in the U.S. will increase by average of 5.3 percent per year through 2018, down from the 8.9 percent increase last year. More consumers are also buying their phones through second-hand and trade-in markets like eBay, Gazelle and Glyde. According to Bloomberg, Glyde said that used-phone sales to consumers is up 88 percent this year compared with the same period in 2014.

The shift toward device financing isn't going away and appears to only be accelerating, according to the carriers. AT&T's (NYSE:T) Ralph de la Vega, CEO of the carrier's Mobile & Business Solutions Group, said earlier this month he thinks AT&T will eventually stop offering two-year contracts because of consumer demand. AT&T said 65 percent of its postpaid smartphone gross adds in the first quarter came from its AT&T Next plans, up from 58 percent in the fourth quarter. 

In late May AT&T's national retail partners and third-party dealers began moving toward offering just AT&T's Next equipment installment plan option, in which customers do not get a subsidized device, but instead pay off their phones through monthly payments and can upgrade to a new phone earlier. 

Verizon Wireless (NYSE: VZ) is currently seeing 50 percent of customers who are buying new smartphones or upgrading to a new smartphone choosing its Edge program, up from 39 percent at the end of the first quarter. Verizon also changed its Edge program at the end of May so that customers need to pay off the full cost of the device before upgrading, which will likely decrease the number of upgrades the carrier sees.

T-Mobile started the trend to EIP programs more than two years ago. At the end of the first quarter, 92 percent of the carrier's branded postpaid customer base was on a no-contract Simple Choice plan, which do not come with subsidized devices.

Sprint (NYSE: S) said 53 percent of its postpaid smartphone sales were on an equipment installment plan or a leased plan in the first quarter, up from 46 percent in the fourth quarter. In the first quarter, Sprint said 37 percent came from leasing and 16 percent came from installment billing.

For more:
- see this Bloomberg article

Related articles:
T-Mobile unveils 'Jump On Demand' program, lets customers upgrade 3 times per year
AT&T's de la Vega: 2-year contracts will eventually go away
Report: Apple stores to sell only unsubsidized AT&T iPhones, will adopt Verizon Edge changes
AT&T offers new Next option requiring 30% down payment up front
Verizon: Edge customers now must pay off smartphone before upgrading, but get to keep old phone
Verizon, AT&T, Sprint and T-Mobile likely to finance $37B in devices this year, analysts say
Recon Analytics: U.S. handset sales slipped 15% in 2014 amid equipment installment plan boom

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