Intelligence Brief: Will 5G iPhone change the game? - Mobile World Live

Intelligence Brief: Will 5G iPhone change the game?

13 OCT 2020

Apple will hold a virtual media event today (13 October) at which it is expected a new iPhone with 5G capability will be unveiled.

The would-be successor to its most recent models, the iPhone 11 and lower priced SE, carries with it extra intrigue because Apple is a relative latecomer among handset manufacturers to the 5G era. While this would not be the first time Apple has eschewed a rush to market approach, the stakes are higher now with new iPhone sales constrained by longer upgrade cycles and, of course, the Covid-19 (coronavirus) pandemic.

There is also the question of whether Apple can inflect broader 5G adoption single-handedly by introducing the world to a feature it did not know it needed. We explore potential implications below both from the perspective of Apple and 5G take-up more broadly.

Rush to buy or wait and see?
The first question to understand is the likelihood of current iPhone owners to upgrade to a 5G model. The positive for Apple is that it commands a fiercely loyal customer base. Our survey data indicates more than 90 per cent of iPhone owners want their next phone to be another iPhone, well above any other handset manufacturer. Furthermore, with their higher-than-average levels of income, the Apple user base is better positioned to afford the new handset and the accompanying 5G mobile tariffs than its competitors.

A number of factors, however, indicate take-up may not follow a mass migratory path:

  • Upgrade intentions are still middle of the road. Our survey data (see chart, below, click to enlarge) suggests existing iPhone owners are no more likely to upgrade to 5G than others, with both it and Samsung just under 40 per cent in the US (the situation is similar in Europe).
  • Retail constraints. Apple’s brand ethos, customer-friendly browse and try shopping, and reliance on the mobile operators as a distribution channel means it has historically benefited heavily from in-store sales. The Covid-19 (coronavirus) pandemic has resulted in widespread operator retail closures, which means that 35 per cent to 40 per cent of handset sales through the mobile operators will move online, or be delayed until social distancing measures are relaxed. Despite Apple’s own well-established brick-and-mortar retail network, reduced appetite for in-store shopping over the Christmas/holiday sales period could blunt new iPhone sales.
  • Income pressures. Set against a context of already-lengthening replacement cycles, discretionary income pressures brought on by Covid-triggered reduced work hours or unemployment could further slow purchase volumes beyond an initial wave of keen adopters in the holiday season. Part of this will come down to how a new iPhone is priced. In reviewing the more than 50 5G handset models released so far, the median retail price is just over $800 (Samsung and Huawei generally being at the higher end while Oppo and Vivo are at the lower end). Apple has traditionally released the base model of a given iPhone generation at $1,000, a 25 per cent premium to the prevailing rate, something Apple customers have been happy to pay in the past but may find less space to do so in the current economic environment.

For Apple, the next iPhone marks a crossroads
The iPhone has been the primary driver of Apple’s success as a business and indeed socio-cultural icon over the last ten years. However, smartphone saturation and lengthened replacement cycles in the US and Europe, which have increased from two years on average in the LTE era to three-and-a-half years now, has precipitated a period of reduced sales growth to the point where, in calendar 2019, iPhone revenue declined 6.6 per cent on the prior year and now account for around 45 per cent of Apple’s revenue compared to more than 60 per cent two years ago. This is, of course, before any exacerbating effects from the pandemic.

In this context, the expected 5G handset launch represents not only its next model, but a gateway into Apple’s strategy for the next ten years. Beyond device sales, the strategic imperative for Apple is retaining customers in its content and payments ecosystem, the glue of its business model. For the time being, this strategy rests on a range of media including video streaming, music and gaming (health also plays a role but generally not a monetisable one). The company does not regularly disclose user counts for these services, but we can infer a somewhat tepid level of take-up based on figures released in the past.

Music, for example, reached 60 million customers at the start of 2019, equivalent to a 6 per cent conversion rate of the iPhone base. Apple TV+, its streaming service, is rumoured to have a take-up rate lower still, with a portion of such customers getting it for free.

The 5G model offers the company a chance to take advantage of new technical capabilities in the standard, particularly low latencies. Following the move to bundle many of its services under the Apple One banner, the technology may provide a vehicle for Apple to revive some of its flagging services by including them alongside those which stand to benefit from the new technology, such as Apple Arcade or Apple TV+. With mobile gaming, in particular, touted as one of the key use cases for 5G, Apple is likely hoping its entertainment subscriptions will lure users into the Apple One bundle and lock them into its services ecosystem.

The takeaway point here is that while the new iPhone is likely to follow past iterations of incremental technical advances, 5G technology offers Apple an opportunity to reset and reorient its longer-term services strategy.

What could it mean for overall 5G adoption?
Size, influence, brand power and heritage all mean that what Apple does matters. This is particularly the case for the mobile operators deploying 5G networks and attempting to sell the merits of higher-value data tariffs on new use cases. In 2011 to 2012, the iPhone was positioned as a flagship handset by many mobile operators keen to capitalise on the newfound ability to stream videos on a mobile phone, something that had not been possible before at any sufficiently good quality. The result was a period of sustained positive revenue growth, with pricing premiums applied for the higher speeds.

The challenge now with 5G is overcoming the perception among consumers that it is just another speed upgrade given LTE is quite able to handle most of the things people currently do on their phones. In this sense, it matters hugely how Apple positions any new services, especially those based on AR or VR, which take advantage of 5G’s unique capabilities given its past precedent for introducing the world to features it did not know it needed. More than any other factor including price, it is this X factor which will determine whether the past halo effect of an Apple launch will spread to the broader handset and operator community.

Stay tuned.

– Tim Hatt – head of research and Jason Reed – lead analyst, Digital Consumer, GSMA Intelligence

The editorial views expressed in this article are solely those of the author and will not necessarily reflect the views of the GSMA, its Members or Associate Members.

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