iPhone Upgrade Program: Rotten Experience

In theory, Apple’s new iPhone Upgrade Program sounds like a no-brainer. Just agree to pay ~$32-$45/month forever (depending on the model) and you can always get the new iPhone as soon as it comes out. So I went to the Apple Store in Santa Monica, California one day after the iPhone 6s was released to buy it through the program. But the whole experience turned into a debacle.

When you buy an iPhone on launch day/weekend, you can expect there to be a line. Fortunately, the initial wait turned out to only last 30 minutes, even though I didn’t make a reservation. I had seen all the iPhone lines dating back to the original iPhone, so it was a pleasant surprise to be able to walk in and buy the iPhone on day 2. But that only got me to the front of the line to pay.

A sales associate greeted me with a new iPhone in the box. When I told her I wanted to buy through the iPhone Upgrade Program she says we’ll need your driver’s license, credit card, and social security number to get your loan approved! Say what? I’m buying a phone, not getting a mortgage. Nevertheless, I provided all personal data but was told — DENIED! No reason was ever given, and who knows what it did to my credit.

For the next 30 minutes I became Sherlock Holmes trying to figure out the problem. I called two different credit card companies, but they had no clue and were of no help. The Apple associate submitted my info twice using different credit cards, only to be rejected each time. At this point, I gave up in frustration and just paid full price for the iPhone. Certainly not a pleasant experience, but at least I got out the door with a new phone in just over an hour.

One might think if you purchase the iPhone Upgrade Program you’re buying from Apple, but you’re not. You’re actually getting approved for a 2-year loan for the cost of the iPhone + tax + AppleCare+. But the loan is not from Apple, it’s from a bank called Citizens One (see disclosure). That means a credit check is required and a credit card is needed to automatically accept the monthly fees. At purchase time, the out-the-door cost for a 16GB iPhone 6s is first payment + tax, which in my case would have been $94.07. Instead I ended paying $710.66 ($649 + 9.5% tax). Note, I didn’t buy AppleCare+.

Why was it so difficult and why does the Upgrade Program require AppleCare+? I think the answer is more about financial engineering and insurance, then actually pleasing the customer. Apple uses a third-party bank so it can recognize the full sales price of the iPhone as revenue, instead of just the first payment at purchase. Next, the insurance, otherwise known as AppleCare+ is padded into the price forcing everyone to buy it, which allows Apple to recognize another $129 of revenue per purchase. Shrewd moves that should make Apple’s bottom line even better.

The AppleCare+ requirement is interesting, because most its benefit comes after year one. If you are upgrading phones every year, you never get to the second year’s benefits. Meanwhile, the included manufacturer’s first year warranty covers just about any problem you may have. The only caveat is if you accidentally damage your phone, you can get a replacement for $99 (a maximum of two times) with AppleCare+.

No matter how you buy, you’ll be paying Apple now or later, but you’re paying Apple. The ulterior benefit to the company is iPhone Upgrade Program essentially locks you into the Apple iOS eco-system. Why switch manufacturers if you can keep getting a new iPhone, with what I would expect to be “minimal” effort. At the same time, it forces the phone carriers into commodities that have to compete on price, service, and potentially content. That may eventually be better for consumers if carrier fees are reduced.

We all expect more from a company like Apple. The iPhone Upgrade Program should be the fastest, easiest way to buy an iPhone. It fell short, at least for me. Perhaps, I should blame Citizens One, but I had never heard of them before walking into the Apple Store. On the other hand, why couldn’t a purchase be linked to my iTunes account, since they already have that on file or any of the credit cards linked with Apple Pay? Unexplainably, Apple lost control of the customer purchase experience and could have made the process so much better. Now, can Apple re-imagine the iPhone Upgrade Program?