Apple's iPhone Trade-In Program... Desperate Or Brilliant?

| About: Apple Inc. (AAPL)

I'd be foolish to believe that most people reading this article haven't already heard of Apple's (NASDAQ:AAPL) new iPhone trade-in plan, but for those of you who didn't see the market current on the Seeking Alpha home page, Apple is basically allowing folks with pre-existing iPhone products to trade them in for store credit to use towards a newer iPhone. While this business plan certainly sounds pretty brilliant, is it just a desperate attempt to stave off the fact that the high end smartphone space has seen its growth slow significantly?

The Bull Case: Apple's Ecosystem Gets Sweeter

Right off the bat, I believe that this helps to stem market segment share loss to the bevy of Android devices on the market. While the Android ecosystem offers variety and choice, Apple's ecosystem offers consistency and, now, a very nice upgrade path. If a customer pays "$199" for an iPhone (on contract) and then gets to sell it back for at least $120, then there's a very real incentive for the customer to quicken his/her iPhone upgrade cycle as it becomes nearly "free".

Now, that's not to say that Apple is really introducing anything fundamentally "new" here - older iPhones do tend to hold their value quite well, and I'm sure many of the more savvy buyers happily put their old phones up for sale on eBay (NASDAQ:EBAY) or use another trade-in program such as the one offered by GameStop (NYSE:GME), but having it at the Apple store likely makes it far more convenient for the majority of users.

More importantly, this seems to be a move to help keep people within the Apple ecosystem, rather than defecting to the Android camp. The mindset that Apple will likely try to foster is that once you're in the Apple ecosystem, you can very easily keep up-to-date with the latest products for much more cheaply than you could in the Android space. While I certainly expect that a player like Samsung (OTC:SSNLF) would be able to implement a similar "trade-in" scheme if it turns out to be a material market share shifter, the rest of the Android players likely don't have the scale to do so.

The Bear Case: Is Apple Desperate?

There's no escaping the general viewpoint that the high end smartphone market is showing significant signs of saturation. The low end market, in which a major feature-phone to smartphone transition is happening, is still growing quite nicely. Apple doesn't play in this market today, although it looks as though with the imminent launch of the iPhone 5C, the company will attempt to extend its reach into lower price-point devices. However, there's no escaping that the double-whammy of increased competition in the high end smartphone space, coupled with this saturation phenomenon, is driving Apple to be more aggressive in pushing new products.

The interesting thing to watch will be how well the upcoming iPhone 5S sells with this trade-in program in place. The iPhone 5 did well, but it was certainly not the hit that the 4S was before it, particularly as a good number of customers took advantage of the price reductions on the iPhone 4 and 4S following the iPhone 5 launch rather than going with the latest-and-greatest. Will the iPhone 5S have killer new features that naturally drive a massive upgrade cycle? Will the trade-in program help to fuel sales of higher ASP, newer products? Only time will tell, although I'd be quite surprised if Apple's shares didn't get an initial boost from the new product launches.

I Like The Trade-In Program, But I'm Still Sitting On The Sidelines

I believe that this trade-in program could drive a mild to moderate mix-shift to higher GM/higher ASP iPhone products on the heels of the new product launches. While time will tell how well Apple can defend its market share against very competitive Android offerings, this is an excellent step towards doing so. That being said, I still don't want to budge from the side-lines here. Apple has already bounced nicely off of its 52-week lows, and optimism for new products - coupled with the boost that Carl Icahn has given the shares - makes me hesitant to believe that there's enough upside surprise to make me forget about the very real long term risks that Apple and its shares face.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.