Will Verizon’s Free iPhones Help Apple Win New Loyalists?

There are some companies outselling Apple’s (NASDAQ:AAPL) iPhone. Android smartphones are more purchased globally than iPhones. As of the third quarter last year, SamsungĀ (SSNLF.PK) and Nokia (NYSE:NOK) sold more phones than Apple globally. But this next competitor comes out of left field: Apple’s current iPhones are being challenged by Apple’s older iPhones.

It seems not all smartphone buyers are interested in shelling out $650 to buy the shiny new iPhone 5. Some are defecting to phones made by companies like Google (NASDAQ:GOOG) and Nokia, but those intent on getting their hands on an iPhone now have a cheaper option — and they’re taking it.

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Verizon Wireless (NYSE:VZ) is offering customers old merchandise at a steep discount — those signing 2-year contracts can get the iPhone 4 for free. The lure of a free iPhone, even an older model, helps Verizon rope customers into expensive and highly-lucrative contracts while clearing stocks of outdated phones. And the practice is good for Apple, as well. Once users are drawn into the Apple ecosystem, many tend to buy more Apple products over the years — a phone upgrade, an iPad, maybe eventually a desktop. The synchronicity of Apple’s products, the way they complement each other, encourages users to buy more devices running Apple’s OS or iOS…

Morgan Stanley has the numbers that prove just how effective this bait can be. According to a survey last month, about 83 percent of iPhone owners polled said they would upgrade to another iPhone. That’s even more than the 73 percent who responded favorably in 2011. Like a drug, it seems the iPhone hooks users and keeps them coming back for more. And continuing with that simile, it seems the iPhone may be the most potent drug in the smartphone market. According to Morgan Stanley Research, it “has one of the highest upgrade rates in the industry.” For comparison, Samsung’s retention rate was only 63 percent in the recent survey.

While it has strong long-term potential, Verizon’s deal might have a negative impact on iPhone sales in the short-term, as it has the potential to seriously undercut sales of the new iPhone 5. Morningstar analyst Brian Colello said, “The shift toward older phones may weigh on average selling prices.” But, as the above statistics show, it is likely that the increased base of iPhone users could ultimately benefit Apple, as the majority of those users are likely to stick with Apple and continue upgrading their products, maybe even branching out to buy Apple’s tablets as well. As long as a good share of those upgrades are to newer iPhone models, Apple might have more to gain than lose here.

So, while a blast-from-the-past ghost of Apple might be underselling the current Apple — the iPhone 5 accounting for less than half of Verizon’s iPhone activations last quarter — it appears to be a winning situation for the company all in all.

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