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Introduction
On September 9, 2015, Apple Inc. (Apple) launched its new iPhone 6s and iPhone 6s Plus models and, at the same time, announced the “iPhone Upgrade Program,” a new way to purchase those iPhone models in Apple’s retail stores throughout the U.S.

Under the program, eligible consumers could buy an iPhone 6s or 6s Plus and, as a form of payment, agree to a 24-month loan in partnership with Citizens Bank (Citizens). An iPhone purchased under the program was unlocked, meaning customers were able to switch their wireless carrier according to their contract terms. The offer included Apple’s AppleCare+ service, which provided extended warranty and software support compared to the regular one-year limited warranty. After one year, the iPhone customer could turn in her old iPhone, get a new iPhone model, and enter into a new installment loan agreement with a new two-year payment obligation. In the event the iPhone Upgrade Program was terminated by the customer, the customer was responsible for any outstanding balances due under the terms of the loan with Citizens Bank.
Following the announcement, several financial analysts reacted positively to the new upgrade program; some of them described it as a “smart move” forward.
According to one UBS analyst, the “Upgrade Program increases stickiness and makes the iPhone look more like an annuity business.” A J.P. Morgan analyst estimated that Apple’s margin for an iPhone sold under the new program could be four times higher than that for iPhones sold through the carrier channel, as Apple was charging $50 more per device under this program.
A UBS analyst wrote that the iPhone Upgrade Program “could be a big deal,” as it allowed Apple to take control of the customer relationship. One observer predicted that 75% of Apple’s iPhone customers would eventually switch to an annual upgrade, increasing Apple’s U.S. iPhone unit sales by 10% over three years.

Company Background
The iPhone went on sale for the first time at the end of June 2007 and, at a starting price of $500, was immediately criticized by bloggers and news commentators for being too expensive compared to an average smartphone priced at around $200.
The doubts were soon dispelled. By the end of 2007, Apple sold 2 million iPhones, and almost 7 million in the last quarter of fiscal year 2008. From a strategic perspective, between 2007 and 2014, Apple had been “remarkably consistent”16 in maintaining a smartphone price somewhere near $700 and annually launching anticipated handsets that featured incremental or radical innovations.
Apple typically released new iPhone models in the fall, increasing Apple’s smartphone units sold and boosting revenue during the first quarter of the fiscal year, which typically started on October 1.18
In 2015, Apple faced a challenging and changing competitive environment. The major wireless service providers such as AT&T, Sprint, T-Mobile, and Verizon were competing for subscribers in a mature U.S. market.19 Most consumers already had a cellphone and switched carriers infrequently.
The average phone upgrade frequency in the U.S. had risen from 18 months in 2010 to an estimated 26 months in 2015.20 The average contract between the consumer and the wireless carrier stretched across two years, in which the customer had to sign an agreement with the carrier and pay earlytermination fees “in exchange for a discounted price on a phone.”21 However, new trends were emerging.

 

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