BayStreet Research, LLC

Google IO to Set AI Bar: Google IO and the Pixel 9s represent a perfect opportunity for Google's almost decades-long Tensor smartphone development to shine. While we believe the Pixel 9s will break new ground in smartphone AI utility, we want to understand how Google will balance its Android OS goals with exclusive Pixel innovations, which could harm Samsung. Either way, with AI expectations increasing, Google IO on May 15th will set the bar for Android AI innovation, and Apple will have to try to respond during WWDC in early June. The rest of Q2 is going to be an exciting time for tech enthusiasts!   AT&T Q1 Results Will Offer Key Insights Into Shift to 36-month Financing: 1Q24 will mark the first full quarter of potential delayed upgrades from AT&T's transition from 30-month to 36-month financing. While we anticipate only a slight y/y decline (1-3%) in sales given numerous factors, such as the earlier S24 launch and generous promotions, there is a potential for a more significant 5-10% y/y decline. We believe larger declines are less likely due to the broader trend of device elongation, which indicates consumers, on average, are waiting longer than 40 months to upgrade. AT&T's results will also provide valuable insights into Verizon's shift to 36-month financing, which is expected to impact premium smartphone sales starting in August 2024 and will notably affect the Verizon iPhone 16 launch. 

S24 Series Stabilize: Last month, we discussed how the initial excitement surrounding the Samsung Galaxy’s S24 AI capabilities led to strong preorders and early launch sales. However, this enthusiasm quickly waned as the AI features lost their allure due to a lack of exclusivity. Our February surveys indicate that sales reps have shifted to traditional sales points for the S24s, such as promotions, camera, and processor improvements over AI abilities. Interestingly, as we exit February, the S24+ has exceeded our expectations, likely benefiting from the S24 Ultra price increase and share gains from the underperforming Pixel 8s. As we move closer to Q2, we anticipate S24 sales will have stabilized their losses as the go-to premium Android option and are on track to end 1H24 down 5-10% y/y. Low-End Android Duopoly: As we enter tax season and the refresh window for low-end Android devices, sales of these cheaper alternatives continue to decline. This is due to years of aggressive postpaid flagship promotions and a shrinking prepaid market. Currently, Samsung and Motorola have a combined market share of over 85% of the postpaid & prepaid low-end Android market (<$600 WS). The success of smaller brands like One+, TCL, and WING has decreased significantly following the end of the 2021/22 chipset shortage. Samsung's streamlined low-end approach and Motorola's broader strategy of offering five devices ranging from the entry Play brand to more premium G Stylus has created a Samsung and Motorola low-end Android duopoly that we currently see only getting stronger.

Key Q4 Takeaways: After all carriers reported sequentially higher upgrade rates in 3Q23 from 2Q23, the first time since 2019, we believed the early trends indicated the iPhone 15s appealed to the sizable and older iPhone 11 and 12 bases. However, AT&T's reported Q4 upgrade rate declined slightly y/y despite improved inventory relative to the iPhone 14s. AT&T's upgrade weakness indicates that despite similarly aggressive promotions y/y, early cycle strength did not continue through December. With a strategic focus on acquisition vs upgrades, both T-Mobile and Verizon, as expected, reported meaningfully lower Q4 upgrade rates y/y. Thus, while we believe Q4 share gains allowed the iPhone 15s to grow slightly vs. the 14s when we consider the impacts of the shift from 24 to 36-month financing, we no longer expect the postpaid market to grow y/y in 2024 and have moved from a low single-digit growth to a mid-single-digit decline for the year.     S24 Fifteen Minutes of AI Fame: Samsung Galaxy S24 US preorders were up 10-15% y/y, with Verizon and AT&T's strength offsetting T-Mobile weakness. Interestingly, with only mild y/y hardware improvements, the S24 preorder excitement was in part driven by Android's Gemini AI innovations, which Samsung marketed as "Galaxy AI." While we were encouraged to see the market interest of these new AI services, the appeal of the S24 series has significantly declined after learning these Android AI capabilities would soon be available to the S23s, Z5 Series, and Pixel 8s. Furthermore, Samsung's decision to increase the price of the S24 Ultra to $1,300, particularly amid carriers limiting upgrade offers, introduces additional challenges for the S24 series that will likely exacerbate sales declines exiting Q1. 

NOTABLE TRENDS   T-Mobile Plans Interrupt Apple Upgrades: Although the Q4 postpaid market is tracking down ~5% y/y, Apple increased its market share at AT&T and Verizon while holding steady at T-Mobile. We believe legacy T-Mobile subscribers' slow transition onto the new pricier Go5G Plus plans hindered upgrades among its large Magenta Max base, who were ineligible for the best iPhone 15 discounts. In contrast, AT&T and Verizon's strong promotional trade-in offers drove y/y iPhone growth, highlighting an unusual divergence among postpaid carriers and creating another headwind for handset OEMs in 2024. We are interested to see if AT&T and Verizon maintain their current level of promotions in 1Q24 to continue to pressure T-Mobile.     A Series of Unfortunate Events: While we forecast slight growth in the postpaid market in 2024 following a lackluster 2023, we are notably cautious on the Samsung S24 series, marking our most apprehensive outlook since the astronomically priced S20 series. The S24 faces potential y/y declines, primarily due to the challenges arising from AT&T and Verizon’s shift to 36-month financing culminating in 2024 and T-Mobile’s weak upgrade trends due to its difficulties in leveraging device subsidies to shift subscribers to its Go5G plans. Meanwhile, we believe healthy iPhone 15 momentum will allow Apple to continue gaining share, adding further pressure to S24 sales.

Smartphone AI Race Begins: The rise of AI promises to revolutionize the smartphone industry, generating new areas for innovation and potentially creating new services worthy of driving upgrade cycles. Google's Pixel 8 Pro, utilizing its current Tensor G3 chip, can power Google's new Gemini Nano AI model, enabling on-device processes such as conversation summaries, Smart Reply, and enhanced photo/video editing. The upcoming Google Assistant update will further augment these capabilities with the integration of Bard early next year. Samsung's S24 will also include expanded AI functionality with their Gauss AI model, and their partnerships with Microsoft may allow for the integration of ChatGPT and Gemini. While Apple is undoubtedly working on competing functionalities leveraging its best-in-class A Series chip architecture, Android's early AI developments could slow the increasing switching to Apple mentioned above, especially if Apple is slow to offer competing services.

iPhone 15's One Two Punch: Ahead of the iPhone 15 launch, the iPhone 11 install base expanded by roughly 40% over last year’s comparable n-4 group, offering a significant upgrade opportunity for the new release. Thus, when early iPhone 15 trends showed a ~30% y/y increase in base iPhone 15 vs base iPhone 14 sales and when our app data analysis indicated substantial iPhone 11 user upgrades, we believed the iPhone 15 cycle was well positioned to grow due to non-Pro sales. However, as the preordered iPhone 15 Pro series began to ship in late October, we have tracked above-average Pro series trends. With this momentum continuing into early November, we now believe the iPhone 15 series is benefiting from the upgrading of two large bases, the four-year-old "holdout" iPhone 11 users and the "early 5G" and "record promotion" three-year-old iPhone 12 base.   Opportunity and Preparedness Meet for Motorola: Motorola seized the opportunity when LG withdrew from the US smartphone market in 2021, successfully increasing its prepaid market share with the G Stylus and Moto G series across carriers. Now, as Samsung prioritizes its high-end market share and reduces its prepaid offerings to a single A14/A15 model, it opens the path for Motorola to capture even more market share. Motorola stands out in the prepaid space with a stronger brand than its competitors, except for Apple and Samsung, and boasts the most innovative lineup, featuring large batteries, stylus devices, and now flip phones. Additionally, Motorola's revival in the postpaid market with the Razr series will likely improve its brand further. With the end of pandemic-related supply issues, Motorola is well-positioned for continued growth.

Sparkling Wine, Not Champagne: The iPhone 15 cycle is tracking up ~5% y/y, driven by base 15 model strength and the lack of a delayed iPhone 15 Plus. We believe base variant strength is a positive sign for the iPhone 15 cycle to finally get the older, more value-focused iPhone 11 base to upgrade. However, our biggest concern remains T-Mobile's relative weakness and the hesitancy of premium Magenta Max plan subscribers—launched in Feb 2021 and offering the best device offers—to upgrade yet again to the pricier Go5G Plus plans to get the best promotions. While slight growth in a down market is a clear positive, we lack conviction trends can improve materially.   Samsung Out for Blood: The S23 FE October launch underscores Samsung's strategic shift away from the low-end market to maintaining premium Android market share. With a portfolio starting at $600 for the S23 FE, $700 for the S22 n-1 flagship, $800 for the S23, $1,000 for the S23+, and $1,200 for the S23 Ultra, Samsung's move presents significant challenges to Android competitors, notably Google. The timing of the S23 FE launch and its price reduction is strategically aligned with the release of Google's Pixel 8 and their recent price increases, creating the perception of a deliberate effort to undercut Pixel 8 sales. Reminiscent of its strategies against competitors like HTC and LG, Samsung, unable to gain share from Apple, appears focused on not ceding share to any other Android OEM.

Early iPhone 15 Thoughts: We believe Q4 iPhone 15 success will come down to carrier promotions, and product innovations over the iPhone 12 series. Despite signs of promotional fatigue in 1H23, we believe the promotional environment will remain strong as AT&T is unlikely to increase exposure to T-Mobile's successful 2Q23 efforts to poach AT&T subscribers. Furthermore, T-Mobile's new Go5G plans will use upgrade promotions to drive subscribers into higher ARPU plans. Thus, Verizon will likely have to match AT&T and T-Mobile’s aggressive offers. Lastly, device innovation relative to the iPhone 12 appears robust, with iPhone 12 upgraders getting several user experience innovations, including a 48 MP vs. 12 MP camera with zoom and macro modes, always-on display, dynamic island, and emergency satellite SOS. With an easier y/y comparison due to the delayed iPhone 14 Plus last year and reducing economic uncertainty, iPhone 15 growth over the iPhone 14s appears possible. A Race to the Bottom: An OEM's success in postpaid now hinges on its ability to deliver a comprehensive device ecosystem. Given the significant development costs required to bring a successful ecosystem to postpaid, the opportunity for budget-oriented OEMs like TCL, NOK and OnePlus to grow seems to be ending. In a declining prepaid market with MOT and SAM taking ~70% of market share, budget-oriented OEMs find themselves vying for a shrinking segment. If this low-end weakness persists and carriers continue to rationalize the number of OEMs, proven brands like SAM and MOT and the WING ODM are well-positioned to benefit. By opting out of brand development and leveraging scale from MOT and SAM ODM business, WING has secured itself a stable foundation on which to weather the storm.

Ultra-Premium Mix at Record Highs: Beginning with the iPhone 12, we have tracked a prevailing preference towards the $1,000+ iPhone Pro variants. The iPhone 14 cycle is setting new records, including late-cycle strength with the Pro variants ending Q2 with a mix north of 60%. As smartphone innovation has slowed, OEMs have put the most substantial year-over-year enhancements in their Ultra-Premium devices. Increased smartphone utility and record carrier promotions have also supported these trends. Carrier's consistent trade-in offers have also reduced consumer apprehension with a $1000+ price tag. With one of the iPhone 15's most innovative features expected to come solely on the 15 Pro Max, we would not be surprised to see more record-breaking Pro variant mix in 2024.   More Foldables Coming: The U.S. foldable smartphone market is adding new entrants as Motorola and Google join Samsung in expanding the category. Google's entrance to the fold form factor affirms Android OS' commitment to improving the foldable software ecosystem. Motorola's latest Razr+ flip, with rumors of an upcoming Razr Lite at a more affordable sub $700 price tag, will expand access to the flip form factor to new price tiers. Samsung's pending fifth-generation Z Series should benefit from increased category awareness and potential improvements in dual-screen app development. While new brands, expanded awareness, and lower price points should help overall, we struggle to believe the category will grow meaningfully due to the lack of incremental utility over Apple's ecosystem, regardless of price, to get a user to leave.