Sprint is betting that its “Forever” smartphone upgrade programs can shorten upgrade cycles even as most mobile users are holding on to their smartphones longer.
The carrier launched its “iPhone Forever” leasing program in August 2015, enabling upgrade-eligible customers to get Apple’s latest phone for $22 a month. It quietly killed a similar program for customers with Samsung Galaxy handsets last July after just four months, but resuscitated the Galaxy Forever campaign a few weeks ago.
Both programs require users to make 12 monthly payments on their current device before being eligible to receive a newer model. The strategy enables Sprint to recirculate those older devices, CEO Marcelo Claure said, increasing revenue from device sales.
“And what we do is we refurbish those devices and then we put them back in the market,” Claure said during Sprint’s post-earnings conference call Wednesday, according to a Seeking Alpha transcript. Claure added that the carrier expects to see “several millions of phones” returned through the programs.
“We put some into our prepaid brand, we put some others in the auction market,” he said. “So you can expect on an ongoing basis that we are going to have some additional revenue as it relates to selling used equipment. I mean, that is just part of our business, it is part of any leasing company and we’ve been doing leasing now for the next two and a half years.”
The programs are clearly designed to counter slowing sales of new smartphones in the U.S. Upgrade cycles continue to slow as carriers have moved away from lengthy contracts and subsidized handsets—which obscure the retail cost of mobile phones—in favor of equipment installment plans (EIPs) or leases, which are more transparently priced.
Indeed, AT&T CFO John Stephens said last week that upgrade cycles may never be as short as they were just a year ago.
“I would suggest to you I think it is a more permanent change in the environment because of the change in who pays for it,” AT&T CFO John Stephens said during the carrier’s earnings conference call this week, according to Seeking Alpha. “I clearly believe it is a permanent change from where we were in the subsidy model, and I believe that the upgrade rates will be down on a permanent basis.”
The “Forever” programs are a double-edged sword for Sprint, though, according to Jennifer Fritzsche of Wells Fargo Securities. Exchanging new handsets for older ones is a costly proposition, but enabling customers to take advantage of newer features and technologies could be an effective way of reducing churn.
“Unlike AT&T, Sprint expects the number of upgrades to be higher year-over-year given its iPhone Forever/Galaxy Forever plans allow(ing) users to upgrade without a meaningful change in price plans,” Fritzsche wrote in a note to investors. “Given most of these users came on when Sprint started turning the corner in terms of sub growth (24-30 months ago) they would be eligible for an upgrade this year. This increase in volume and mix will negatively impact the working capital metric of the free cash flow calculation. Despite this—we note with each new device that is offered the Sprint experience will get that much better in our view as these devices will be able to see the benefits from its carrier aggregation and HPUE initiatives”