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A properly maintained iPhone battery is designed to retain up to 80% of its original capacity at 400 full charge and discharge cycles. You may choose to replace your battery when it no longer holds sufficient charge to meet your needs.
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Your one-year warranty includes replacement coverage for a defective battery. You can extend your coverage to two years from the date of your iPhone purchase with the AppleCare Protection Plan for iPhone. During the plan’s coverage period, Apple will replace the battery if it drops below 50% of its original capacity. If it is out of warranty, Apple offers a battery replacement for $79, plus $6.95 shipping, subject to local tax. Apple disposes of your battery in an environmentally friendly manner.
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Apple has software in the iPhone that can "read" the number of cycles and the current charge state and the maximum charge. I suspect this is similar to the software found on MacBooks. For example the iStat widget on my MBP shows Battery Health 98%; Cycles 18; Charge 96% and the "State" as Charged.

I take those readings on my MacBook to mean, my battery is fully charged (it should be - I leave it plugged in), the battery has a full charge capacity equal to 96% of some spec/standard (which I assume to be the new battery) and 98% for "Health" means it is not in bad condition.

Coconut Battery Charge shows similar information including a current total battery capacity of 6339 mAh which happens to be 97.5% of the original battery capacity of 6500 mAh.

I have taken iPhones to a local Apple Store and had the genius plug a cord into it and read stuff on his screen. He saw among other things a cycle number and a charge value. In one case a genius pronounced the battery as sick and the number of cycles as low. At that point he asked if I was fully backed up. I said yes. He got a new iPhone and we swapped.


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