All-in-one Apple hardware and software subscription inevitable, says analyst
Apple is getting closer to being able to offer a bundle combining its hardware and software services in a single package, Loup Ventures analysts believe, suggesting the company may provide more options for consumers to acquire an iPad, Mac, or Apple Watch via a hardware subscription.
Presently, Apple offers the iPhone Upgrade Program to consumers, enabling participants to pay a monthly subscription fee to possess a current-generation model of the smartphone, and to update it each year as newer models come out. According to analysts Gene Munster and David Stokman of Loup Ventures, this could be expanded to cover other hardware, and possibly even software services like Apple One.
"Apple has a history of perfecting a playbook and then reapplying it to new parts of its business," the analysts start, before proposing the iPhone Upgrade Program could be reused for the Mac, iPad, and Apple Watch lines to create "hardware subscription offerings" for each range.
"Eventually, we envision the company merging its services offerings, alongside hardware subscriptions, to create a 360-degree bundle," the firm suggests. "Think of this as paying a monthly fee to Apple for most of your tech needs."
For Apple, such a subscription would be great from a financial point of view, as it would increase the revenue generated by subscriptions from around 55% to approaching 85%. This could potentially increase Apple's revenue as well as representing a more stable income source than the current seasonal hardware-centric approach.
The digital transformation is apparently being accelerated by the COVID-19 pandemic, which will help push for more workers to stay at home. It is suggested that home working after the pandemic subsides will be roughly three times higher than before, while the shift of education back to schools will still require educators and parents to have the capability to move back to learning-from-home at a short notice.
"With these shifts come a greater emphasis on the reliability and utility of hardware, software, and services we depend on," the investor note reads.
As evidence of this transformation, Loup Ventures points out how Mac revenue grew 29% year-on-year in the September quarter, up from 22% in the June quarter and from the flat growth three quarters previously. The same could be said about iPad, where revenue grew 46% and 31% in the same respective quarters, whereas nine months previously the growth was around 4%.
"Going forward, we believe Mac and iPad growth rates will stabilize around 10% over the next few years," according to Loup Ventures, "representing a step up from flattish growth pre-pandemic."
On consumer purchasing habits, it is thought that this too would improve on two fronts. First, the pace of tech innovation pushes consumers into wanting to own the latest hardware, something that can be answered with subscriptions due to consumers not needing to swallow the full purchase cost in one go.
Secondly, consumers are said to be moving towards a "rent vs buy mentality," citing a survey from 2019 where 31% of Millennials use subscription services compared to 21% of Gen X consumers and 8% of Baby Boomers. The trend affects multiple industries and price levels, the firm suggests, making an all-in-one subscription more plausible.
For consumers, a subscription could offer better value, given this mentality. Using the iPhone 12 as an example, the iPhone Upgrade Program offers the prospect of annual upgrades and incorporates AppleCare for $34 per month, whereas using Apple Card for an installment plan would be $40 per month without Apple Care, making it a more expensive alternative.
While Google and Samsung have relatively similar products and services they each offer, Loup Ventures considers Apple to be in a far better position to perform such an all-encompassing subscription.
For Google, the rate of declining value for its hardware versus Apple's products makes it harder for the search company to do so financially, with trade-in values for hardware like the Pixel 4 versus the starting price being at around 28% while the iPhone is nearer 50%. This impacts its ability to refurbish the older hardware for resale, and the consumer's perceived value of the hardware over time.
On Samsung's side, while the trade-in offers are "in line with Apple's," the lack of integration between hardware and software is the problem. "Apple's tightly integrated ecosystem provides a better user experience and helps keep consumers loyal to its products," the note adds.
Loup Ventures concludes that for such hardware subscriptions to be adopted, the product family needs to work seamlessly together, the service infrastructure has to be in place, and hardware also needs to hold its value. "Apple is the only company that can bring all three of those together."
The note is a continuation of Munster's long-held opinion that Apple wants to be known as a services company rather than one focused on hardware. While this has largely involved years of commentary about Apple's services, this has also included the possibility of bundling "hardware and software together as value-added packages."
Presently, Apple offers the iPhone Upgrade Program to consumers, enabling participants to pay a monthly subscription fee to possess a current-generation model of the smartphone, and to update it each year as newer models come out. According to analysts Gene Munster and David Stokman of Loup Ventures, this could be expanded to cover other hardware, and possibly even software services like Apple One.
"Apple has a history of perfecting a playbook and then reapplying it to new parts of its business," the analysts start, before proposing the iPhone Upgrade Program could be reused for the Mac, iPad, and Apple Watch lines to create "hardware subscription offerings" for each range.
"Eventually, we envision the company merging its services offerings, alongside hardware subscriptions, to create a 360-degree bundle," the firm suggests. "Think of this as paying a monthly fee to Apple for most of your tech needs."
Consumer shifts
It is reckoned the move would capitalize on macro trends of "an ongoing digital transformation and changing consumer buying preferences," with Apple thought to be one of the only companies that could make it work due to their ecosystem and maintenance logistics.For Apple, such a subscription would be great from a financial point of view, as it would increase the revenue generated by subscriptions from around 55% to approaching 85%. This could potentially increase Apple's revenue as well as representing a more stable income source than the current seasonal hardware-centric approach.
The digital transformation is apparently being accelerated by the COVID-19 pandemic, which will help push for more workers to stay at home. It is suggested that home working after the pandemic subsides will be roughly three times higher than before, while the shift of education back to schools will still require educators and parents to have the capability to move back to learning-from-home at a short notice.
"With these shifts come a greater emphasis on the reliability and utility of hardware, software, and services we depend on," the investor note reads.
As evidence of this transformation, Loup Ventures points out how Mac revenue grew 29% year-on-year in the September quarter, up from 22% in the June quarter and from the flat growth three quarters previously. The same could be said about iPad, where revenue grew 46% and 31% in the same respective quarters, whereas nine months previously the growth was around 4%.
"Going forward, we believe Mac and iPad growth rates will stabilize around 10% over the next few years," according to Loup Ventures, "representing a step up from flattish growth pre-pandemic."
On consumer purchasing habits, it is thought that this too would improve on two fronts. First, the pace of tech innovation pushes consumers into wanting to own the latest hardware, something that can be answered with subscriptions due to consumers not needing to swallow the full purchase cost in one go.
Secondly, consumers are said to be moving towards a "rent vs buy mentality," citing a survey from 2019 where 31% of Millennials use subscription services compared to 21% of Gen X consumers and 8% of Baby Boomers. The trend affects multiple industries and price levels, the firm suggests, making an all-in-one subscription more plausible.
For consumers, a subscription could offer better value, given this mentality. Using the iPhone 12 as an example, the iPhone Upgrade Program offers the prospect of annual upgrades and incorporates AppleCare for $34 per month, whereas using Apple Card for an installment plan would be $40 per month without Apple Care, making it a more expensive alternative.
Apple logistics
Apple is "uniquely positioned to expand its hardware subscriptions" from the viewpoint of servicing and maintenance. As a hardware subscription would require more "frequent exchanges between buyer and seller," there needs to be a "seamless return mechanism," something Apple already offers through its various trade-in programs.While Google and Samsung have relatively similar products and services they each offer, Loup Ventures considers Apple to be in a far better position to perform such an all-encompassing subscription.
For Google, the rate of declining value for its hardware versus Apple's products makes it harder for the search company to do so financially, with trade-in values for hardware like the Pixel 4 versus the starting price being at around 28% while the iPhone is nearer 50%. This impacts its ability to refurbish the older hardware for resale, and the consumer's perceived value of the hardware over time.
On Samsung's side, while the trade-in offers are "in line with Apple's," the lack of integration between hardware and software is the problem. "Apple's tightly integrated ecosystem provides a better user experience and helps keep consumers loyal to its products," the note adds.
Loup Ventures concludes that for such hardware subscriptions to be adopted, the product family needs to work seamlessly together, the service infrastructure has to be in place, and hardware also needs to hold its value. "Apple is the only company that can bring all three of those together."
The note is a continuation of Munster's long-held opinion that Apple wants to be known as a services company rather than one focused on hardware. While this has largely involved years of commentary about Apple's services, this has also included the possibility of bundling "hardware and software together as value-added packages."
Comments
Bad for the environment
Let's see what Apple's real motivation is
Do you think Apple bins the devices it gets back?
And I had an uncle who used to say if it goes up in value then buy it; if it goes down in value then rent it.
Which is why a number of my friends have stopped buying cars. They either rent them when they need them, or just rent them and have someone else take care of the expenses for services and maintenance.
Why? When did renting stuff become illegal?
That's the problem. They can't.
Try telling folk that their brand new top-of-the-range iPhone isn't made of shiny-fresh new parts. They'd accuse Apple of selling them second-hand junk.
It's a hell of a balancing act.
I have a Manhattan-CEO uncle, he can certainly afford to buy but also prefers leasing -- if you like a new car or don't plan to drive an old car into the ground, pumping repairs into it as you go for years on end, then leasing is fine if you have the disposable income.
You also don't pay the entire price.
Whether leasing is beneficial depends on the terms, including tax consequences. It's not a decision that should be based on some illogical "never never" rule pronounced by forum poster's relative.
A lease is just a loan -- where you not only pay for the product but then pay for the money used to pay for it -- except you end up with nothing in the end (except a pile of cancelled checks).
True!
There are some good leasing programs out there.
I think a number of products that Apple sells would fit into the leasing model quite nicely, especially for corporate customers who get to leverage tax write offs and seasonal changes in the number of employees or temp workers.
Also, I kind of view several current Apple products as being de facto lease arrangements anyway when you consider things like the difficulty/lack of serviceability, lithium ion battery lifetimes, availability of service parts, and eventual (planned) obsolescence (though to a lesser degree than some vendors). This is very apparent with AirPods. I'd like to see Apple come up with some bundling and service plan option that includes a set of AirPods/AirPods Pro with Apple Music subscriptions. Perhaps if you commit to a ?? month Apple Music subscription, or prepay for ?? months, Apple would throw in a set of AirPods, and a ??+ month prepay or subscription commitment would get you a set of AirPods Pro or an equivalent set of Beats headphones. Maybe something similar for Apple TV-HD and TV-4K boxes with Apple TV+ prepay or subscription commitment.
Finally, there's nothing preventing leasing arrangements from terminating with the opportunity for the lessor to purchase the device at a substantial discount so it doesn't end up in a waste stream immediately. Off lease products could also be directed into other markets, like education, charity, and non-profits.