Why Apple’s hardware subscription service could be a ‘huge deal for the company’

This article was first featured in Yahoo Finance Tech, a weekly newsletter highlighting our original content on the industry. Get it sent directly to your inbox every Wednesday by 4 pm ET. Subscribe

Wednesday, March 30, 2022

Apple’s subscription hardware service could mean more users

Apple (AAPL) reportedly plans to launch a subscription model for devices, in a move that could expand its market to a whole new class of consumers who can’t stomach dropping over $1,500 for an iPhone or four times that for a laptop with keys that get stuck.

The program, expected to launch in late 2022, according to Bloomberg, would help consumers avoid the upfront cost of a new iPhone or MacBook, which can cost $1,599 and $6,099, respectively.

Instead, they would reportedly pay an easier-to-stomach monthly fee. While we don’t know exact prices, experts say the move could boost Apple’s market share and, ultimately, bottom line.

As of Q4 2021, Apple controlled roughly 22% of the global smartphone market, according to technology market research firm Counterpoint. Samsung, meanwhile, made up 19% of the market with Chinese smartphone makers Xiaomi, Oppo, and Vivo capturing the rest. Apple’s least expensive iPhone starts at $429, while Samsung sells smartphones for as little as $159.

Apple CEO Tim Cook greets customers at the new Apple Store on Broadway in downtown Los Angeles, California, US, June 24, 2021. REUTERS/Lucy Nicholson

Apple CEO Tim Cook greets customers at the new Apple Store on Broadway in downtown Los Angeles, California, US, June 24, 2021. REUTERS/Lucy Nicholson

“It’s a huge deal for the company, because they’ve been bumping up against their market share,” explained Loup Ventures’ managing partner Gene Munster.

“Market share, whether it’s the phone or their computer, just moves up ever so fractionally. And you have to think of new ways to win customers over and some of it is through product innovation and the other is through how the products are sold.”

The program wouldn’t just be a boon for Apple’s hardware sales, either. It could also boost the tech giant’s software subscription services at a time when new regulations threaten to hit its high-margin App store.

A lower cost of entry

Apple tends to charge more for its iPhones than its competitors do: The least expensive iPhone is the $429 iPhone SE. It’s a solid device, but unimpressive compared to Samsung’s Galaxy S53 5G, which costs just $20 more. Samsung’s phone has a larger display, more camera options, and a more modern look. To get an iPhone with a larger display and multiple cameras, you’ll have to spend $499 on a two-year-old iPhone 11 or drop $599 on last year’s iPhone 12 mini.

In other words, Samsung offers more for your money. But a subscription program, with the right terms, could make Apple’s iPhone lineup far more appealing for price-conscious consumers. That would help Apple push more customers to its software subscription services — like Apple TV+ and Apple Fitness+ — which have become crucial to its bottom line as global smartphone sales slow.

A subscription hardware plan would also provide more reliable quarterly revenue, since consumers would pay monthly fees. Right now, Apple sees the bulk of its revenue in Q4 and Q1, when it unveils the latest iPhones. With a subscription service, revenue would be spread out across the entire year.

“It smooths out the cyclicality,” explained Harvard Business School professor David Yoffie. “It creates a clear forecast for the company.”

A hardware subscription service could also offset future revenue losses Apple might face as regulators clamp down on its App Store policies, which require developers to pay a 15% to 30% fee on the sale of apps purchased through its App Store. Regulators around the world are increasingly cracking down on the company’s business practices. The EU’s recently passed Digital Markets Act, for instance, lets app developers circumvent Apple’s fees, cutting into the tech giant’s bottom line.

A hardware subscription service, however, could make up for lost App Store revenue, which Morgan Stanley equity analyst Katy Huberty says accounts for 30% of Apple’s Services revenue.

It all depends on the terms

Of course, for a hardware subscription service to work, Apple has to provide users with the right terms. The company already offers monthly installment plans for iPhone customers starting at $35.33 per month, meaning the planned subscription plan will need to replace that or cost less.

Details of the planned subscription are still scant, and Bloomberg points out that Apple could move the program’s launch from 2022 to 2023, or cancel it entirely.

VALENCIA, SPAIN - 2021/09/24: Shoppers are testing Apple brand products at an Apple store during the first day of sale of the iPhone 13 mobile in Valencia.  (Photo by Xisco Navarro/SOPA Images/LightRocket via Getty Images)

Apple could gain more customers if it can offer its products at a lower entry price. (Getty Pictures)

“There’s still a lot of open questions as to how affordable and whether it is a good deal for consumers over time,” Yoffie said.

What’s more, Apple’s revenue will likely take an initial hit, as customers transition from paying for their phones upfront to the subscription model.

“From a revenue recognition standpoint, it’s a negative at first,” Munster said. “But down the road, you have more.”

Apple’s service is months away from being a reality, if it even happens at all. Still, if it manages to pull it off with the right terms, the tech giant could have a slew of new customers and powerful tool to make up for the pain of losing its App Store revenue.

By Daniel Howley, tech editor at Yahoo Finance. follow him @DanielHowley

Read the latest financial and business news from Yahoo Finance

Follow Yahoo Finance on Twitter, instagram, Youtube, Facebook, Flipboardand LinkedIn

Leave a Reply