Mobile Device Replacement Cycles Slow

Mobile installment payment plans, replacing the device subsidy model long favored in the U.S. mobile market, have had some expected, and some unexpected impacts on smartphone adoption and replacement behavior.

Even if the new plans are largely constructed to be revenue neutral to the customer, there does appear to be a slowdown in replacement rates, according to Recon Analytics.

That was a concern when the new retail plans were created, and the concern appears to be justified, to an extent.

In 2014, roughly 143 million mobile phones were sold in the United States, and 90 percent of them were  smartphones. But that represents a drop of 25 million phones from 2013 when approximately 168 million phones were sold (only half of them were smartphones).

The decline in phone sales is caused by the rise of equipment financing plans, but also by slower new subscriber additions.

At the same time, consumers' phone purchase habits have changed significantly.

A growing number of American consumers appear to delay their phone upgrades to take advantage of the lower monthly service prices carriers offer to consumers who wait to upgrade phones at the end of their two-year contracts.

On the other hand consumers who are purchasing replacement phones are focusing on newer, higher priced devices, says Roger Entner, Recon Analytics principal.

While device sales declined by 15 percent year-over-year, device revenues increased by about five percent.

So, as expected, the shift to installment plans appears to be slowing the device replacement rate, a trend that arguably will slow innovation.

Entner expects device sales to fall by five perent to 136 million in 2015 and to fall again by four percent to 131 million in 2016.

In fact, says Entner,”handset replacement has abruptly slowed to the lowest rate since we began calculating the metric.”

Device replacement cycles are lengthening, reaching 26.5 months in 2014, an increase of 4.1 months compared to 2013.

In the past, U.S. consumers typically upgraded their phone at three points in time. Many upgraded at about one year,  when a new generation device was launched.

The next window was an upgrade every two years when the contract expired.

That now is changing.

The percentage of devices replaced at the traditional two year time point fell from 40 percent in 2013 to 16 percent in 2014, while replacement at three years grew from 15 percent in 2013 to 35 percent in 2014.

So nearly half of consumers upgrade every year, but more than a third keep their devices for three years.

Slower device upgrades might also have an effect on service provider efforts to provide more spectrum, as older devices often cannot get access to new spectrum that newer devices can support.

A six year old iPhone 3G will achieve download speeds of 2 Mbps on a 3G network, but a new iPhone 6 will be able to operate 25 times faster due to its new 4G LTE access.

To some extent, the delay in device upgrades also means it will take longer to migrate users off of congested legacy spectrum and onto new bands.