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

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Wednesday, March 30, 2022

Apple’s subscription hardware service could mean more users

Apple (AAPL) plans to launch a subscription model for the devices, which could expand its market to a whole new class of consumers who can’t bear to drop more than $1,500 for an iPhone or four times as much for a laptop with keys that be blocked.

The program, which is 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 pay a more digestible monthly fee. While we don’t know exact pricing, experts say the move could boost Apple’s market share and ultimately bottom line results.

In the fourth quarter of 2021, Apple controlled about 22% of the global smartphone market, according to technology market research firm Counterpoint. Samsung, meanwhile, accounted for 19% of the market, with Chinese smartphone makers Xiaomi, Oppo and Vivo capturing the rest. Apple’s cheapest iPhone starts at $429, while Samsung sells smartphones for as low as $159.

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

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

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

“The market share, whether it’s the phone or their computer, is only increasing very slightly. And you have to think of new ways to win customers and part of that is product innovation and part of it is how products are sold.

The program wouldn’t just be a boon to 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.

Lower entry cost

Apple tends to charge more for its iPhones than its competitors: the cheapest 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 bigger screen, more camera options and a more modern look. To get an iPhone with a bigger screen and multiple cameras, you’ll need 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 line much more attractive to price-conscious consumers. This would help Apple attract 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 a monthly fee. Right now, Apple sees the bulk of its revenue in the fourth and first quarters when it unveils the latest iPhones. With a subscription service, revenue would be spread over the entire year.

“It mitigates the cyclicality,” explained David Yoffie, a professor at Harvard Business School. “It creates a clear forecast for the business.”

A hardware subscription service could also offset future revenue losses that Apple may face as regulators restrict its App Store policies, which require developers to pay 15% to 30% fees on the sale of apps. applications 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 example, allows app developers to bypass Apple’s fees, hurting the tech giant’s bottom line.

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

It all depends on the terms

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

Planned subscription details are still scarce, 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 test Apple branded products at an Apple store during the first day of iPhone 13 mobile sales in Valencia.  (Photo by Xisco Navarro/SOPA Images/LightRocket via Getty Images)

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

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

Additionally, Apple’s revenue will likely take a first hit as customers shift from paying for their phones upfront to the subscription model.

“From a revenue recognition perspective, it’s negative early on,” Munster said. “But on 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 do so under the right conditions, the tech giant could have a slew of new customers and a powerful tool to offset the pain of losing App Store revenue.

By Daniel Howley, technical writer at Yahoo Finance. follow him @DanielHowley

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