Why 2015 is a Make or Break Year for Apple's iPhone

By Markets Fool.com

Next year will be vital for Apple , and not just because of the Apple Watch.

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The success (or failure) of Apple's first wearable is likely to be important, but theCupertino tech giant's performance in 2015 will depend primarily on the device thatgenerates the vast majority of its revenue and profit: the iPhone.

The unprecedented demand for the iPhone 6 will make it a tough actto follow. Sales of the 2015 model, however, will be made even more interesting by a gigantic shift taking place in the U.S. smartphone market.

Although they have been building for about 18 months, the effects of this shift haven't been seen just yet. Butinvestors in 2015 should finally see how Apple's iPhone business will perform in a radically different domestic. smartphone market.

Say goodbye to two-year contracts
Two-year contracts for smartphones are increasingly a thing of the past in the United States. T-Mobile was the first major telecom to ditch contracts, in 2013, but all of its rivals have followed. Even Verizon, which has long been an ardent supporter of contracts, has begun to aggressively push subsidy-free plans, and expects to sell one in four new smartphones through its contract-free Edge plan in the fourth quarter.

Earlier this year, a Macquarie Research analyst estimated that nearly one-half of U.S. smartphones would be sold on these subsidy-free plans by the end of the year, up from about 25% in the first quarter.

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More than one-third of Apple's revenue comes from North America, and more than half of its revenue comes the iPhone. In terms of market share, the U.S. is one of the iPhone's most dominant segments, ensuring the continued support of U.S.-based mobile developers. In other words, the U.S. smartphone market is vitally important to Apple.

The upside to going subsidy-free
Apple could be poised to benefit from the move away from subsidies. Subsidy-free plans -- Edge, Jump, Next -- all give buyers the ability to upgrade their smartphones at a more rapid rate.

A Verizon customer who purchased an iPhone 6 on Edge this past October, for example, could upgrade to the iPhone 6's successor when it makes its likely debut next fall. The same is true for AT&T's Nextand T-Mobile's Jump -- though they vary on a case-by-case basis, all of the major contract-free plans allow customers to upgrade more quickly than they could have in the past.

An iPhone 5s owner, envious of the larger screen, might have wanted this year's iPhone 6, but held back because he or she was not eligible for an upgrade. As contract-free plans grow in popularity, this will no longer be an issue.

The downside to ditching contracts
But there is a major downside to these plans' growing popularity: although they make it possible to upgrade more often, they actively discourage it.

With two-year contracts, customers are incentivized to upgrade regularly every other year -- regardless of how long you've had your phone, your monthly bill stays the same; why not get a new phone and take advantage of the subsidy?

But without subsidies, that is no longer the case. After two years (or however long the unsubsidized phone takes to pay off -- some plans are as long as 30 months) the monthly bill drops. Depending on the cost of the handset and the level of service, that savings can be quite substantial (an iPhone 6 on an unsubsidized plan runs about $30 per month, or more than half of T-Mobile customers' 1GB plan).

Getting a new phone, then, means beefing up the bill. If, after two years, their iPhone is still working, it's easy to imagine cash-strapped consumers sticking it out to reap the financial benefits.

How will it play out?
Will Apple benefit from the shift or see iPhone sales decline? Frankly, no one really knows. The data just isn't there yet.

T-Mobile introduced these plans early in 2013, but the other carriers did not follow suit for several months, and really only began pushing them in earnest this year. We won't see until next fall if these plans encourage customers to upgrade more often.

In the past, Apple's management has explicitly cited changes to U.S. carrier upgrade policies to explain iPhone sales figures -- in a mature market like the U.S., carrier upgrade policies are a determining factor in how many iPhones will get sold in any given quarter.

Admittedly, the two effects could cancel each other out -- the number of people with subsidy-free plans upgrading early might largely match upwith the number of people who hold on to their iPhones for extended periods of time.But a major shift seems likely. This could be the biggest story affecting Apple in 2015, and it's something shareholders should definitely be aware of.

The article Why 2015 is a Make or Break Year for Apple's iPhone originally appeared on Fool.com.

Sam Mattera has no position in any stocks mentioned. The Motley Fool recommends Apple and Verizon Communications,. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.