Compiled by Zhou Ruifeng, a reporter from China Economic Weekly
According to Bloomberg, Apple is developing a hardware subscription service similar to current iCloud storage that will allow users to "subscribe" to iPhones or other Apple devices. It's like renting an iPhone instead of buying one.
(Screenshot source: MacRumors)
Users can pay monthly and use the device for the duration of their subscription. This would be an ideal option for consumers who are less well funded.
Subscriptions to iPhones are said to be "similar" to subscriptions to iCloud or Apple Music, where users can subscribe to hardware using their Apple ID and AppStore account.
It is reported that the iPhone is already Apple's largest source of sales, generating nearly $192 billion in revenue in 2021, accounting for more than half of the company's revenue. Bloomberg said Apple's adoption of a hardware subscription service similar to its car rental program would be a major strategic shift. It could help Apple generate more revenue and make it easier for consumers to accept spending thousands of dollars on new devices.
What's different from the usual installment plans is that the monthly fee Apple charges may not be fixed (depending on the device model the customer ultimately chooses) and not simply split the price of that device into amounts for 12 or 24 months. And, when new hardware comes to market, customers participating in the program can also trade in for new ones.
Compared with the previous "year-to-year renewal" program, which was limited to the iPhone, the subscription service may cover all of Apple's hardware products.
The iPhone's "renew every year" program
Apple has discussed within the company about hardware subscription plans bundled with services such as Apple One and Apple Care. Apple launched apple one in 2020, allowing users to subscribe to several services including TV+, Arcade, Music, Fitness+, and iCloud storage for a lower monthly fee.
Bloomberg said the program has clear benefits for Apple. This will increase user stickiness and allow consumers who want to regularly upgrade their phones more firmly into Apple's ecosystem rather than switch to Android. And those who upgrade less often can be encouraged to upgrade more often. In addition, the company's revenue will become more predictable.
More importantly, it will also increase profits.
As the pace of innovation for the iPhone slows, so does the frequency of purchases by consumers. According to Apple's own assessment, people nowadays only change their smartphones once every three years. But in the early days of the iPhone, the replacement cycle of the phone was only two years.
Bloomberg pointed out that Apple has offset the decline in the frequency of hardware purchases to some extent by raising prices, adding subscription services such as Apple Music, TV+ and Fitness+, and accelerating the popularity of iCloud. But it still doesn't get consumers to buy new iPhones on a regular basis, as they used to. As the average price of mobile phones continues to rise, some investors worry about how much more Apple can raise prices, especially as inflation squeezes consumers' incomes.
From the perspective of buying a phone, Apple's existing installment plan is usually two years. For example, a $999 iPhone 13 Pro has a monthly payment of $41.62 for 24 months.
However, the average iPhone ownership cycle is 3 years, and Apple can only generate hardware revenue in two of those years.
The subscription model allows consumers to update their phones more regularly. As things stand, if the average consumer buys two iPhones in a 6-year cycle, they may buy at least three in a subscription model.
The additional income generated by this can reduce the monthly payment, which will generate more profits while benefiting consumers. According to the material list of analyst firm TechInsights Inc., the gross margin of apple's iPhone 13 Pro is about 43%. Reducing gross margins by 8 percentage points, Apple can still get more absolute profits because 35% of $2997 (the price of 3 iPhones) is more than 43% of $1998 (the price of 2 iPhones).
What's more, because consumers may have to return their old devices at each upgrade, Apple will be able to recycle or refurbish old devices for resale. It's a huge opportunity to boost the iPhone's profit margins: The official iPhone 11 Pro sold on Apple's website sells for just 22 percent less than the original price. Moreover, recycling old devices will also enhance Apple's environmental credibility.
All in all, it's a savvy way to get extra profit from consumers, especially if the upcoming new generation of iPhones may have only minor improvements. At present, the speed at which users can upgrade their iPhones is also accelerating, thanks to the demand for 5G devices, but this trend is unlikely to last forever.
Apple has been preparing for the project for several months, but it has recently been shelved, possibly because it may be to launch Apple Pay's "buy-before-pay" service faster. Still, the subscription service is expected to launch by the end of 2022, but it could also be delayed until 2023 or eventually canceled, people familiar with the matter said.
Some on Wall Street have previously urged Apple to switch to a subscription model. Toni Sacconaghi, an analyst at Sanford Bernstein, came up with the idea of a hardware subscription in 2016 when he said it could help Apple achieve a $1 trillion market valuation.
Although Apple did not adopt this approach at the time, the company's market capitalization has now reached $2.84 trillion.
Recently, Saknaji reiterated his ideas. He said it's hard to come up with something more commonly used than the iPhone.
Renting an iPhone is cheap compared to drinking a daily Starbucks coffee or a long-term subscription to The New York Times.
Apple is not the first company to launch a hardware subscription service. Google has tried a similar approach on its Chromebook laptop, targeting enterprise customers.
Compiled from Bloomberg, MacRumors
Editor-in-charge: Guo Jiyao
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