Back in January of this year, Apple CEO Tim Cook told analysts something that didn’t make a lot of news at the time but in hindsight is turning out to be incredibly important if you want to understand why the iPhone 6 and 6 Plus are decimating the competition.
We had the highest number of customers new to iPhone last quarter than in any other prior launch; and also that the current iPhone lineup experienced the highest Android-switcher rate in any of the last three launches, in any of the three previous years.
The two key words there are “Android switcher.”
Now a note to investors from Credit Suisse analyst Kulbinder Garcha and his team, coupled with another recent note from Cowen & Co., have provided more evidence that Apple has gone beyond its previous strategy of merely creaming off the high-end buyers and leaving the rest of the market alone.
Rather, Google’s Android system now appears to be functioning as a marketing on-ramp for iPhone: New phone buyers on budgets — teenagers, lower income people, and folks who just need a phone but who don’t need all the top-end bells and whistles — buy Android. Once they’re used to smartphone life, they then switch to iPhone. Android is becoming a kind of marketing entry device for iPhone, in other words.
We’ve got some data showing that case, but first, here’s the context:
“Android switchers,” as Cook calls them, are Apple’s new secret weapon and a huge threat to Google. We previously made the case that the old structure of the phone market is breaking down. Prior to the iPhone 6, it was segmented by price: Rich people bought iPhone, everyone else bought Androids, which are cheaper and generally better value. But now it looks as if Apple is stealing share from Android and persuading shoppers who were previously guided by price to get onto the iPhone/iOS platform. Numbers from ABI Research suggest we’re seeing a situation where even consumers on modest incomes are saving up and buying iPhones. There are very few products where poor people feel compelled to do that — cars and weddings are two of them. Apple is making inroads much further down the economic ladder than it used to, perhaps.
Here is the new data from Cowen & Co. analyst Timothy Arcuri and his team, separately from Credit Suisse, on who is buying iPhone 6:
- Cowen:~25% of all 6/6+ purchases have been “virgin” demand (primarily Android “switchers”) meaning Galaxy S6 likely represents “do or die” for Samsung at the high-end.
- Credit Suisse: Retention rates remain very high. Across multiple surveys and industry analyses, we find that Apple’s retention rate remains and has remained very high, i.e. around 90-95%.
To recap, 25% of new iPhone buyers are old Android users. And 95% of existing iPhone customers re-up into a new iPhone.
Clearly, those two stats indicate that Apple is grinding off millions of Android users onto the iOS platform. Credit Suisse believes Apple might sell 238 million iPhone 6’s this year.
This is, despite what critics like John Gruber say, an existential issue for Android. There is no point in Android if it does not have massive market share, because there is no point being on the cheaper platform if so few other users are on it. The tech business relies on network effects: A mass of users attracts a mass of app developers and advertisers, which make the platform fun and keep it free. Too few users, and the developers and advertisers — and all the money they spend — will disappear.
I can see this on-ramp effect in my own life. last year, I abandoned iPhone in favour of a Samsung Galaxy S5. I loved it. The Galaxy is way better than my old phone, iPhone 5.
But a year later my Android is showing a little more wear and tear than I would like. The cover fell off the recharging socket. The new Android “Lollipop” update has slowed my machine down considerably. And some of the functions have become buggy. Contacts keeps crashing and the camera takes ages to boot up.
I prefer the Android system to iOS, but I need a phone that I can rely on. Weirdly, I’m seriously considering getting an iPhone 6 Plus or the iPhone 6S Plus (if such a beast emerges in a few months) even though I dislike the iOS operating system. I use my phone all day — I can’t tolerate non-functional apps.
This, perhaps, may be why the iPhone 6 is becoming such a juggernaut. Android phones are great, but once you become dependent on your phone you need a high level of reliability — and at that point iPhone 6 starts to look like a really good deal even if you would prefer to spend less.
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