Gene Munster: Shift In Carrier Industry May Boost Apple's iPhone

In a report published Wednesday, Piper Jaffray analyst Gene Munster maintained an Overweight rating and price target of $172 on Apple Inc. AAPL. The analyst mentioned that investors might be waiting to see the impact Apple has on the shift of carriers to a monthly installment model of phone pricing, which means that prices would not be subsidized.

Carrier Plans

Despite the Next and Edge plans having been launched in the summer of 2013, major carriers in the United States have only moved towards installment pricing over 2014.

"The plans sell the benefit of enabling customers to pay no money down and, in some cases, upgrade their devices earlier instead of the typical two-year subsidized window. Over time, we believe this could result in a compressed upgrade window for some iPhone users," according to Munster.

However, there does not appear to be any indication of a specific quarter when the tailwind will be recognized, and the analyst believes that the impact could be a more gradual albeit consistent one, spreading across multiple quarters, as users increasingly transfer to installment plans.

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Munster also believes that with the upcoming launch of the iPhone 6s in September, "customers on installment plans in Q3 and Q4 of 2014 are potential early upgrade customers,"

There are likely to have been about 21.4 million and 32.6 million smartphone users in the US on installment plans in 3Q14 and 4Q14, respectively, although not all were on 12-month upgrade plan and neither will everyone on such a plan exercise their upgrade option.

Even if 30 percent of the installment plan customers choose an early upgrade, it would total 6.4 million early upgraders in 3Q15 and 9.8 million in 4Q15. The analyst expects the U.S. iPhone market share to stand at about 45 percent in CY15.

Upgrading

According to Munster, one aspect that could potentially impact early upgrade plans is that most customers would need to trade in the device they are currently using. If these iPhone customers have been upgrading their device with every cycle, it would mean that there would be a specific number of devices that are only a year old, which would typically be the mid-tier phone, given Apple's pricing structure.

"We believe carriers could potentially sell those at rates lower than Apple's mid-tier offering for an unused device, thus potentially impact Apple's sales of mid-tier devices. We believe the mid-tier typically provides between 15-25% of device sales in a given quarter," Munster added.

What this essentially means is that there could be less mid and lower tier device sales and greater high tier device sales, which in turn would lead to a higher ASP.