Apple hardware subscription could shift focus away from iPhone shipments

Posted:
in AAPL Investors
Apple could be on the verge of a broad business shift away from iPhone shipments to installed base monetization if rumors of a hardware subscription are true, according to an analyst.

iPhone 13 Pro and iPhone 13 Pro Max
iPhone 13 Pro and iPhone 13 Pro Max


In a note to investors seen by AppleInsider, lead Morgan Stanley analyst Katy Huberty writes that a rumored hardware subscription that would allow users to own an iPhone with monthly payments would "pivot the investor narrative away from transactional to recurring sales."

Huberty says that the current average Apple pays only $1 per day for hardware and services. However, she believes that the average user would also be willing to pay more to access both Apple devices and software.

As far as the difference between a hardware subscription and the iPhone upgrade program. A pure subscription service would do away with finite payment periods, for example, meaning that an iPhone owner would "pay a certain price per month into perpetuity to gain access to their device."

To that end, Apple would likely debut multiple offerings at different pricing tiers. A lower-tier offering could allow access to a legacy iPhone every 24 months, while higher tiers could give users access to newer devices and other perks.

"While there are a multitude of different bundles Apple can ultimately create with a subscription offering, the introduction of pricing tiers - as opposed to one flat subscription rate - that would allow Apple to capture each user's greatest willingness to pay based upon their consumption of Apple products and services," she writes.

As far as the benefits of a subscription model, Huberty believes that it could reduce hardware replacement cycles, increase the spend per user, and spur adoption of first-party Apple services. It may shift more customers to a direct-to-consumer model by foregoing carriers or retailers.

The analyst also believes Apple will offload repayment risks by continuing to partner with a third-party financing service. Apple already does that with Goldman Sachs for the Apple Card or Citizen's One for financing in the U.S.

Huberty writes that Apple's leading retention rates and its expanding ecosystem have already created a platform. A move away from traditional transactional sales to recurring revenue would "drive meaningful upside to Apple's share price," she notes, given the lifetime value of an Apple user.

The analyst is maintaining her 12-month Apple price target of $210. The price target is based on a 6x enterprise value-to-sales multiple (EV/Sales) on Apple's product business and a 10.6x EV/Sales multiple on Services, which implies a 33.2x target price-to earnings multiple.

Read on AppleInsider

Comments

  • Reply 1 of 19
    Sorry, I’m not renting a phone in perpetuity.
    xsmidarkvaderioniclencapinncwatto_cobrabyronl
  • Reply 2 of 19
    Yes, people will see that the monthly cost of renting an iPhone is only a small fraction of their monthly payments to telecommunication companies. 
    watto_cobra
  • Reply 3 of 19
    It will never happen.  No one wants to pay for a iPhone for ever.  Come on apple, stop being greedy. 
    darkvaderbyronl
  • Reply 4 of 19
    xsmixsmi Posts: 138member
    Sorry, I’m not renting a phone in perpetuity.
    I’m not cool with this either. I usually give myself at least a year of no phone payments before I trade in and buy the next one. 
    Anilu_777watto_cobrabyronl
  • Reply 5 of 19
    darkvaderdarkvader Posts: 889member
    That's a big fat no from me.  Renting something that lasts 6-8 years?  Why would I want to do that?
    BrianJbyronl
  • Reply 6 of 19
    I would never rent one but it seems to me that it will have strong appeal to Apple users who want cradle-to-grave support from Apple.
    sandorbyronl
  • Reply 7 of 19
    Anilu_777Anilu_777 Posts: 360member
    Likely this is another US-only deal like Apple Card but even if available I’d prefer an iPhone Upgrade type of program where I know I don’t have to pay after the time period is over. What are they going to do if I cancel my subscription - make me pay out like a lease or take the phone? I’d rather pay in full at the Apple Store and be free of monthly device payments. I save until I can, not buy every year. If I can’t afford the cash I don’t buy. 
    argonautwatto_cobrabyronl
  • Reply 8 of 19
    bloggerblogbloggerblog Posts: 2,259member
    This is a brilliant move!! You gotta consider the other unspoken advantage. Apple can use this platform to negate any efforts at an alternative AppStore or open app payment methods. Rental means you don't own the device therefore Apple can provide only the options they deem critical for an ideal experience, aka bypass the aggressive efforts of the likes of Facebook and Epic. So even if a country, say like the Netherlands, wants Apple to open their app payments, Apple could provide that country with only the rental option and not need to abide by the order.
    I have a feeling Apple will make their rental option more appealing to buyers than purchase and continue to develop their kick-ass ecosystem without much government or corporate intervention. 
    watto_cobra
  • Reply 9 of 19
    bloggerblogbloggerblog Posts: 2,259member
    xsmi said:
    Sorry, I’m not renting a phone in perpetuity.
    I’m not cool with this either. I usually give myself at least a year of no phone payments before I trade in and buy the next one. 
    I see where you're coming from, but how about if the payments were exactly the same as if you bought a phone and kept it for two years?
    watto_cobra
  • Reply 10 of 19
    sandorsandor Posts: 643member
    Being that i still have my original SE & that replaced my iPhone 5 & both were bought on the used market, i realize i am not a target market here.

    End users who are on 5 year upgrade paths to used phones are not the source of Apple's revenue.

    However, i do think that there would be large numbers who want a new phone when released & will not be against paying monthly to have that happen.

    It is the same mechanism that allows people to drive the new car they want & trade it in for a new model...paying $500-600 a month for the opportunity.
    In perpetuity.
    FileMakerFellerwatto_cobra
  • Reply 11 of 19
    Imagine if, for a monthly fee, you got an iPhone to use that's no more than two years old, 50GB of iCloud, plus a replacement if it stops working at no additional cost? No worry about AppleCare or replacement charges because you don't own it. You're renting the device. And you can get a newer model if you see fit (perhaps for an upgrade fee if sooner than two years). You'd always have the latest and peace of mind that you'll never pay to have the phone repaired. Sounds good to me.
    watto_cobrabyronl
  • Reply 12 of 19
    lkrupplkrupp Posts: 10,038member
    For those here who scream and holler about the evilness of subscription software this would, of course, be anathema. But as we know the caterwauling of tech blog comment sections have never reflected the real world market that Apple serves. Lots of people lease cars, lease apartments, lease vacation bungalows, lease boats, etc. They make home and car payments in perpetuity for their entire lives and build the payments into their budgets. Why not now essential tech like a mobile phone? Leasing an iPhone sounds good to me. I’m already paying $3/mo for AppleCare+ on my series 4 Apple watch and happy to do it.
    edited March 28 watto_cobrajony0
  • Reply 13 of 19
    If I were still running my own business I would leap at this. For the private purchaser, it's substantially less appealing, but for commercial customers? No-brainer. Give me phone, tablet, laptop and/or desktop on a subscription basis so I'm only dealing with a single supplier and getting predictable monthly costs with constantly improving performance at a very slight premium over the current situation.

    Apple's making yet another tactical move into the enterprise market.
    watto_cobra
  • Reply 14 of 19
    BrianJBrianJ Posts: 7unconfirmed, member
    Kind of funny in that this is EXACTLY what the phone industry was doing before Apple got into the game.  'Subsidized' phones buried the cost of the phone into the monthly fees, and people could then go get new phones every 2 years.  Keeping the same old phone didn't get you a reduction in your phone bill, so it made sense to go out and get a new one.

    It was a real struggle for carriers that had to explain to people that they couldn't just get another $10 phone when they broke theirs, and the full price was something much higher.  This is essentially exactly the same thing all over again!
    entropysbyronl
  • Reply 15 of 19
    I’m not going to rent an iPhone myself, but I do imagine there will be a subset of users out there who could imagine paying 5 USD/month for a rented iPhone 14 Pro. Knowing Apple, it would cost $10/month or more, minimum ($120/year, and >= $240 on a 24 month lease contract). However, it would be less than their current iPhone Upgrade Program.

    EDIT: being a leased device, they could probably offer refurbished rental, too, making two different customers pay for the same device, 2 years lease + 2 years lease. It would be marketed as ”the first closed-loop iPhone ever” (environmentally friendly business model, except … Apple’s real motivation is to make extra amounts of profits and just resell, resell, resell …)

    edited March 28 byronl
  • Reply 16 of 19
    sandorsandor Posts: 643member
    BrianJ said:
    Kind of funny in that this is EXACTLY what the phone industry was doing before Apple got into the game.  'Subsidized' phones buried the cost of the phone into the monthly fees, and people could then go get new phones every 2 years.  Keeping the same old phone didn't get you a reduction in your phone bill, so it made sense to go out and get a new one.

    It was a real struggle for carriers that had to explain to people that they couldn't just get another $10 phone when they broke theirs, and the full price was something much higher.  This is essentially exactly the same thing all over again!

    It was more akin to the oil companies subsidizing the cost of the cars/profiting off extended lease-purchase of them. (sounds insane, right?)

    Apple took back control of the price, cost & transparency of the hardware for the hardware manufacturers. 
    All the cell companies have since added back lease-purchase plans, but they are not necessarily tied to a service contract.
    edited March 28 watto_cobra
  • Reply 17 of 19
    I’m not going to rent an iPhone myself, but I do imagine there will be a subset of users out there who could imagine paying 5 USD/month for a rented iPhone 14 Pro. Knowing Apple, it would cost $10/month or more, minimum ($120/year, and >= $240 on a 24 month lease contract). However, it would be less than their current iPhone Upgrade Program.


    Considering that the current buyback program is almost $50/month for the iPhone 13 pro for the yearly trade in program, it's highly unlikely that you'd ever see the program offered at $5/month.  If you consider the depreciation on the iPhone X, that just came out about 42 months ago, paying $5 per month would mean paying only $210 in those 42 months.

    Original price on that device was $1000.  Current market price is under $250.  The depreciation alone is around $18/month.  Since the monthly depreciation dollars decrease as the device gets older, there's absolutely no sane way to think that Apple would rent you a device for $5 or even $10 per month that would decrease in value faster than the income that they are making.

    The only way you could rent a $1000 iPhone for $5/month would be to sign a 20 year agreement on it.  Pretty tough to do with a device that has typically about a 5 year lifespan.
    muthuk_vanalingamargonautwatto_cobra
  • Reply 18 of 19
    mattinozmattinoz Posts: 1,913member
    Won't this generate lots of waste or will there be subscription tiers for 2nd or 3rd generation devices?

    Say like family/business plans new device each year for one family member iCloud handle the roll down overnight so everyone gets a newer phone.

    Some like this would be more interesting with MacBooks and MacStudios in small office land.
    edited March 28 watto_cobrabyronl
  • Reply 19 of 19
    I wouldn’t do it. I like owning things rather than renting, leasing or borrowing. I HATE owing money to anyone and always pay off loans early. I don’t mind at all paying $1,500 for a top line iPhone or $2,600 for a laptop and use it for several years before selling it or trading up to a new one. I’m still on the 11 Pro Max, a late 2015 MBA and an early 2011 iMac! My iPad Air 2 was slowing down big time and running out of space so I bought the 4th gen Air when it came out. I’m actually a month or so away from purchasing a new 24” iMac cause I love that green! 🤗 And it’ll be a fully specked out model since I’ll probably be keeping that for another 10 years. 
    muthuk_vanalingamwatto_cobrabyronl
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