Entner: Handset replacement cycles haven't changed in two years, but why?

Roger Entner Recon Analytics

Roger Entner

The handset replacement cycle stayed at 21.7 months in 2012, exactly the same as when I calculated it using the 2010 numbers. Nothing changed--so is this actually news?

Let's consider a few facts:

· The number of smartphones in the United States has increased to more than 50 percent in the past two years, up from about 20 percent in 2010.

·The availability of smartphones has broadened substantially, as has their affordability, even though top of the line smartphones are significantly more expensive than feature phones.

·Consumers are blissfully unaware that smartphones are also significantly more expensive to make because their capabilities are magnitudes more powerful than that of feature phones.

·Top of the line smartphones are sold by the manufacturers to the operators for $400 to $650. The operators sell the devices to consumers for $99 to $249 per device. This means consumers spend $200 to $400 less than what the device actually costs compared to paying $50 to $150 less than what a feature phones actually costs.

·As the percentage of smartphones among all devices being sold reached 70 percent to 90 percent, depending on the carrier, Wall Street analysts rang the alarm bells and prognosticated about the imminent doom of the wireless industry. Analysts argued that the wireless operators did not have financial capabilities or business models to sustain such a heavy upfront investment into devices. Operators disagreed but listened regardless.

·Incentive programs to upgrade device before contract expirations have been curtailed but had no impact on the handset replacement cycle:

o   On January 16, 2011, Verizon Wireless discontinued its "New Every Two" handset upgrade program.

o   On April 1, 2011, AT&T increased the early upgrade price for smartphones by $50 and for feature phones by $10.

o   Sprint changed its early upgrade program in October 2011 so that customers on contract could renew at the 22-month point in their contract instead of the 20-month point.

Notably, people are clinging to their historic phone upgrade behavior patterns. They generally upgrade their devices at the one-year point, the two-year point or when the device breaks. The one-year point is driven by fashion- and technology-driven buyers who need to have the newest handset available. The two-year point is driven by the availability of the device at the subsidized price point. After this, the device is generally replaced when it breaks.

Despite removing all these incentives to early upgrades and the increase in cost of the devices, the handset replacement cycle stayed constant, driven especially by the fashion- and technology-focused buyers. Because device upgrades are the most discretionary of wireless expenditures, it is a testimony to the additional utility that new devices coupled with 4G networks, and especially 4G LTE networks, provide consumers provide that consumers find irresistible.

Roger Entner is the Founder and Analyst at Recon Analytics. He received an Honorary Doctor of Science from Heriot-Watt University. Recon Analytics specializes in fact-based research and the analysis of disparate data sources to provide unprecedented insights into the world of telecommunications. Follow Roger on Twitter @rogerentner