Apple iPhone sales depend on those who have one already

After more than a year of hoopla, we’re finally on the doorstep of Apple’s most important product event in several years.

But there’s a critical question that even Apple die-hards can’t confidently answer: How many existing iPhone owners will buy the latest models?

This will be the most important figure to watch because the vast majority of new iPhones – about 81% of the global total this year, according to Bernstein stock analyst Toni Sacconaghi – are sold to people who already own one.

Making some assumptions about the percentage of iPhone users who might buy the new arrivals, iPhone sales could increase by as little as 11% to as much as 45% in the Apple fiscal year that ends next September, according to a Bloomberg Gadfly analysis.

A few percentage points difference in purchases by current iPhone owners can be the difference between Apple popping champagne in 2018 or settling for stale beer.

The rate of purchases from current iPhone owners is tough to predict for at least two big reasons: The highest-end new iPhone model is likely to break the $1,000 smartphone barrier, making it a test of how much people are willing to pay for a pocket supercomputer.

And two, particularly in the US and other mature technology markets, people have been holding onto their existing phones for longer than they did a few years ago.

To show my back-of-the-envelope math: Sacconaghi estimates there will be roughly 773 million iPhones owned in the world by the end of Apple’s current fiscal year, which ends this month. If 25.5% of those owners buy a new iPhone in the next year, Apple could sell about 239.5 million phones in fiscal 2018.

That figure is based on current reality; BTIG Research estimates 25.5 percent of customers for the nationwide US mobile companies will buy a new phone model this year.

Based on the Gadfly analysis, this rate would result in a relatively disappointing 11% increase in iPhone sales. (The average of Wall Street estimates calls for Apple to sell about 14% more iPhones in fiscal 2018 than this year. )

The last time Apple changed its products so drastically – the fall 2014 debut of the first larger-screen iPhones – sales of the device jumped 37% in the first full fiscal year after launch.

The other end of the range assumes Apple flashes back to this high-water mark. At the first full year of sales for the 2014 iPhone 6 line, Apple executives disclosed that a “low 30s” percentage of existing iPhone owners had opted for the latest models.

If we give Apple wiggle room and use 35% as the upgrade rate, the company could sell 312.9 million iPhones in fiscal year 2018, or 45% more than this year.

Few people expect the upgrade rate to bounce all the way back to those halcyon days. As you can see in the below chart of Nomura Instinet data, the trend is clear: A smaller percentage of America’s mobile phone customers are buying new phones in a given three-month period than they did in 2014 or 2015.

This trend is not good for Apple. The company sells to the world, of course, not just to Americans. But the US remains an important market for smartphones, and similar trends exist in other countries.

Financially, Apple will be fine even if a relatively large share of iPhone owners stick with their older phones for a while. As Apple rings up higher average prices for each phone, revenue can increase sharply next year even if the company doesn’t sell many more phones.

Apple has also been getting a sales lift recently from products other than the iPhone. Both iPad and Mac sales are growing again after a rough patch, and app sales, Apple Music subscriptions and ancillary gadgets like AirPods are giving the company a lift. In Apple’s third quarter ended July 1, the iPhone accounted for 55 percent of revenue, the lowest share in three years.

Share of Revenue Generated by iPhone in Fiscal Third Quarter – 55%

But the absolute number of iPhones sold nevertheless matters a lot to Apple. The product is the center of Apple family of products, and sales of the Apple Watch, app downloads and the coming home speaker gadget are tied at least loosely to iPhone sales. The more iPhones the company sells the better off it is financially and strategically.

Remember this when you read breathless reports in coming days and months about Apple’s latest gadgets: The fortunes of the world’s most valuable public company are highly sensitive to the unpredictable habits of hundreds of millions of iPhone owners.


Read: What to expect at Apple’s biggest event in years


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Apple iPhone sales depend on those who have one already