How Apple Could Create The Ultimate Software & Hardware Bundle
Understanding the history of Apple's subscription push, how it would work for a hardware device, plus some quick bytes from the week in tech.
Happy Sunday! Last week, I reviewed the AirPods Max. This week, I turn my attention to whether Apple can create its own Amazon Prime-esque bundle, plus some quick bytes from this past week. Lets go…
On Thursday, Mark Gurman reported that Apple is working on a hardware subscription service that would allow owning an iPhone and other Apple hardware products to be akin to paying a monthly app fee.
My initial reaction was… doesn’t this already exist? In the US, Apple has run the iPhone Upgrade Program since 2015, which basically enters consumers into a short-term loan, paying for their iPhone monthly, and allows them to upgrade to the new iPhone each fall. In Canada, Apple started a hardware installment program in August of 2021 and our big three telcos all offer devices for $0 down, 0% APR, with the price of the device split equally across 24 months. So this begs the question, how will Apple’s rumoured subscription be different and why the continued push to create recurring revenue?
First, it is important to understand the state of smartphone pricing. Apple has traditionally sold its devices at full cost, outright. This was an attraction to consumers who didn’t want to get in bed with a carrier for two years, but has become an increasingly tougher pill to swallow as smartphone prices have crept in to the $1,000+ range. The entry level iPhone 13 costs $949, with a maxed out 1TB iPhone 13 Pro Max setting you back a whopping $2,229. Apple and carriers have adjusted for this by offering trade-in credits and installment programs allowing for a buy-now-pay-later type approach. I have to think that this rumoured iPhone subscription would differ, offering hardware for less than just the base device price split over 12-24 months and bundle an iPhone with other hardware, say AirPods and AppleCare, or potentially create an Amazon Prime type bundle with Apple’s other software services.
Next, you need to understand the allure of a recurring revenue bundle and Apple’s shift to service revenue over the past five years. “Rundles” are loved by investors as they allow business to have predictable revenues that can be forecasted into the future, but they also are a result of powerful trends in consumer psychology. Both consumers and businesses mistake an abundance of choice as a good thing. In reality, consumers want less choice and more confidence in the fewer choices presented to them. If you are a beloved company, you can attempt to consolidate many purchases into one, increase your average-revenue-per-user (ARPU) by expanding your offering, and even move less popular or newer products by including them in the bundle. Microsoft was effectively able to crush Slack with its Teams product by including it in its Office365 subscription, and Amazon has perfected the art of introducing add-ons to Prime, while slowly increasing the price over the years.
Apple has already begun to emphasize recurring revenue and has shifted its strategy in recent years to growing its service vertical; attempting to diversify away from its reliance on iPhone hardware revenue and the seasonality that comes with it. With Apple Music, Arcade, TV+, News+, Fitness+, and iCloud, Apple now has a formidable offering of services that offer existing Apple customers more value and provide greater reason to continue to buy Apple hardware in the future. Apple now has 745 million paid subscriptions and services made up 18% of Apple’s Q4 2021 revenue (the iPhone accounted for 51%). Apple has also shown interest in financial services with Apple Pay and the Apple Card, and I increasingly think they will release some type of health/wellness service, given Tim Cook’s comments on that area of interest.
In 2020, Apple finally bundled these services in a subscription service they call Apple One. Apple One comes in the form of three different tiers for individual vs family users, and a Premier tier with an even greater product offering. My family has the Premier tier, and while some services are rarely used (Apple Arcade), newer services like Fitness+ and News+ have become regulars, and the 200GB of iCloud is a blessing for photo storage and device backups!
As strong as these services have become (TV+ has come a long way, and its original movie CODA is now nominated for best picture), the ultimate value unlock would come from Apple combining its services and hardware into one subscription product for all your Apple needs. iPhones start at ~$40/mo.1 and the Premier tier of Apple One is ~$34/mo. I believe Apple should announce Apple One+, combining these for a discounted $60/mo. price to get the latest iWhatever and unlimited Apple media cued up for you. Apple could offer tiered price laddering by adding the Apple Watch (~$22/mo.2) and/or AirPods (~$9.95/mo.3) to the hardware subscription at $75/mo. and $80/mo respectively.
As an avid Apple user, such a bundle and pricing structure would be great for me, and I believe it will help Apple create more consistent streams of revenue, decrease customer churn by creating lock-in, and unlock its next trillion in market capitalization. At the same time, I fully acknowledge how bundling and the economic power of big tech (Scott Galloway calls them the Death Stars of our economy) can create unfair markets and antitrust scrutiny. While that is a topic for another day, I naively believe Apple acts differently than that of Facebook or Google; but can admit it has work to do with app developer relations and App Store fees.
Anyways, Tim Cook, if you want to trademark Apple One+, call me! (just kidding you probably already have it trademarked and under lock-and-key in Cupertino 😜)
Quick Bytes:
📺 What I’m Watching
The past month in streaming releases has been heaven for techies like me. Disney+’s The Dropout with Amanda Seyfried playing the recently convicted Theranos exec, Elizabeth Holmes, and Showtime’s Super Pumped with Joseph Gordon-Levitt playing the outspoken former Uber CEO, Travis Kalanick, are great, if overdramatized, retellings of some of the biggest stories in Silicon Valley in the past 20 years. My favourite of the bunch is Apple TV’s WeCrashed; based on the podcast of the same name, it tells the story of the rise and fall of WeWork with Anne Hathaway as Rebekah and Jared Leto playing Adam Neumann to an eerie perfection. Linking the trailer below, but highly recommend the watch if you have Apple TV+:
⚖️ Tech Regulation From Across The Pond
The E.U. has taken aim at US big-tech firms with the Digital Markets Act. In short, it tries to neutralize “gatekeepers” and ensure large platforms cannot pool data collection from their various services unfairly, attempts to create interoperability to allow consumers to switch products/services more easily, and companies like Apple may have to allow alternatives to the App Store. While there might be some interesting ideas in concept, how these regulations would work in actuality and the unknown potential consumer harms create far too many grey areas. These regulations are great for large app developers like Spotify or Epic Games (not exactly your mom-and-pop apps), but I think they will ultimately cause more harm than good for the end consumer; you know, the actual constituents of these politicians.
↕️ Chronological Social Feeds Make A Comeback
Given the algorithmic outrage that social media feeds have caused in the past few years, some have been longing for the OG days of the chronological feed. Finally, Instagram has listened and brought it back as a feature. If you go to your Instagram home page, tap the down icon next to the Instagram logo, you can now choose between Following and Favorites. Following will return your feed to a chronological order, and Favorites will allow you to choose your top 50 accounts. It’s not a permanent switch to chronological as you will always default back to the algorithmic feed, but hey, it's a start!
That’s a wrap folks! Hope you all had a great weekend, feel free to share any feedback, and stay tuned for the next edition!
iPhone 13 mini starts at $39.54/mo. over 24 months.
Based on Apple Series 7 starting price of $529 over 24 months.
Based on AirPods 3rd generation full price of $239 over 24 months.