iPhone 8 will be a huge test of Apple's secret weapon: the 500 million-strong 'installed base' (AAPL)

pulse

September 11, 2017 8:26 AM

Citi analysts Jim Suva and Asiya Merchant believe there will be 500 million iPhone users when iPhone 8 launches. About 75% will upgrade to a new iPhone.

The launch of Apple's new iPhone — we don't yet know whether it will be called "iPhone 8" or "iPhone Edition" or "iPhone something else" — will test one of the strongest parts of Apple's business: its massive "installed base."

Citi analysts Jim Suva and Asiya Merchant believe that there will be 500 million existing iPhone users by the time iPhone 8 launches. About 75% of them can expect to eventually upgrade to a new iPhone, they say.

That sounds like a positive for Apple: It implies the company will get a huge bump in sales as soon as the new phone is available. But there has been a debate among analysts over whether the base is a benefit or a drag on new phone sales.

The critics argue:

installed base has stopped growing

This chart illustrates part of the problem: In 2016 and 2017, iPhone shipments declined even though the installed base of users grew:

Now the Citi team weighs in with some new data. Yes, they say, the installed base has weaknesses. It replaces its iPhones every 32 months now, when back in 2014 the replacement rate was 28 months. And only 75% of the base today will eventually upgrade into a new Apple phone, they say, when in the iPhone 6 cycle it was 85%.

iPhone 6 (2014-2015)
iPhone 8 (2017-2018)
Source: Citi

But the new phone will blow that data out of the water, they say.

The replacement rate was extended to nearly three years not because Apple's phones were so good that people were happy to use them for longer. Rather, it was because iPhone 7 was so similar to iPhone 6 that fewer people felt compelled to upgrade, the Citi team told clients in a recent note. When the base gets a look at the all-new iPhone 8 — with its glass body and full-width screen — a massive replacement cycle will kick in, they say.

Most importantly, the installed based is now 200 million people bigger than it used to be. So even if a few customers balk at the +$1,000 price of the new phone there will be more than enough to push Apple back to growth.

pulse