Are you truly the owner of the products you purchase? And does this distinction hold long-term significance?
What would be your monthly expenditure for a comprehensive suite of Apple products, including a Mac, iPhone, iPad, home accessories, and various services such as health and home security? Furthermore, how many among Apple’s vast user base of 2.5 billion would subscribe to such an ‘Apple Plus Services’ package, and what predictable, high-margin monthly revenue could this generate for the company, which once primarily focused on hardware?
Apple as a Service: A Viable Model?
The concept of ‘Apple-as-a-Service’ has been a long-standing point of speculation regarding the tech giant. While Apple has explored similar ventures, such as the iPhone Upgrade Program, it hasn’t fully integrated hardware and software into a unified, service-centric package. However, this could evolve. Last year, Bloomberg’s Mark Gurman reported that Apple had contemplated a hardware subscription service but ultimately paused the initiative due to concerns about its potential effect on conventional hardware sales.
At present, it seems increasingly feasible for Apple to transition its core business entirely towards services, especially given that over a billion individuals already utilize at least one of its offerings. Delving into these usage statistics, Apple recently provided insights into its services segment’s performance:
- iCloud+ boasts 900 million active subscribers.
- The App Store serves 850 million active users.
- Apple TV+ has attracted 58 million subscribers.
- Apple Pay is accepted by 15 million merchants.
In the US, Canada, and Australia, Apple News holds the top position among news applications.
Building on this, the company launched the Creator Studio suite, an exceptionally valuable offering providing industry-leading audio and video production tools like Final Cut Pro and Logic, alongside various imaging and productivity applications, all for $12.99 monthly. These creative expression tools are arguably integral to the Mac’s identity, a core aspect of Apple’s philosophy.
By making its premier creative applications available as a service, Apple significantly influenced both software and services revenue, shifting focus from one segment to bolster another. Apple’s perspective seems to be that the sales method is less crucial than market adoption and the sustained generation of high-margin (approximately 70%) services revenue. (This segment alone generated $30 billion last quarter.)
Challenging the Notion of Ownership
A common objection to hardware-as-a-service models is the consumer’s desire for ownership. While this sentiment holds true, a closer examination reveals that we frequently use devices we don’t truly own. Consider the iPhone obtained through a carrier contract, the Mac being paid off via credit card, iPads for a field team secured with a bridging loan, or a new Mac purchased directly from Apple on a monthly payment plan.
As noted by CIRP Partner and Co-Founder Josh Lowitz, even four years prior, nearly half of all iPhone owners financed their device acquisitions, making monthly payments for a new phone. Additionally, roughly one-third opted to trade in their old device upon purchasing a new one. This indicates that a substantial segment of the user base is already familiar with a model where they essentially lease, rather than truly own, their phones.
We routinely utilize equipment without outright ownership. An Apple hardware-as-a-service model could adapt to this, potentially providing full hardware ownership after a predetermined number of payments. However, it’s the alternative outcome that would likely attract most users.
Consider the appeal of a subscription that includes a new Mac every two to three years and an iPhone every other year, complete with AppleCare. This mirrors current behaviors, as many consumers already leverage Apple Trade In, returning their older devices for credit towards new purchases. This demonstrates a widespread comfort with a quasi-subscription approach to hardware ownership.
Enhancing the User Experience
Why would Apple shift from hardware sales to services? The primary drivers are increased profit margins and the establishment of a reliable revenue stream, but also a desire for greater control over the user experience. This strategy would allow Apple to not only refine its hardware continuously but also, by knowing the precise devices its customers use, to tailor software and service enhancements specifically for that hardware.
Envision this as an evolution of Apple’s integrated ‘whole widget’ philosophy, which combines hardware, software, services, and silicon, all managed within a cohesive ecosystem.
Such an ecosystem also presents strong environmental benefits. It would streamline the process of recalling older devices for recycling, directly integrating reclaimed components into the circular manufacturing system Apple aims to establish. Developing such a system becomes significantly simpler when there’s precise knowledge of the weekly volume of recycled components available, a detailed insight a hardware subscription model could offer.
Playing the Numbers Game
Would consumers embrace this kind of ownership model? To a degree, universal adoption isn’t critical. Success doesn’t hinge on every consumer participating. With 2.5 billion Apple users potentially reachable, the company only needs to convert a modest percentage to a combined hardware, software, and services subscription to secure a stable revenue stream.
As a hypothetical scenario, if merely 1% of Apple’s user base (25 million individuals) opted for a services, Mac, and iPhone bundle at $129 per month, this would yield $3.2 billion in monthly revenue. Although I anticipate the actual cost would be higher, given Apple’s pricing strategy, this calculation illustrates the significant revenue potential from introducing a subscription choice for products purchased through the Apple Store.
From a financial perspective, Apple possesses an inherent advantage that would likely resonate positively with Wall Street, as investors typically assign higher valuations to technology companies with substantial recurring revenue compared to those reliant on fluctuating hardware sales cycles.
Conceivably, if a Mac and iPhone were accessible via a monthly subscription, Apple could more readily upsell consumers to premium configurations through its revitalized Apple Online Store, thereby securing additional revenue with each mutually agreed-upon memory upgrade.
Moreover, with user satisfaction consistently in the high 90s, Apple would likely find it simpler to integrate customers more deeply into its comprehensive ecosystem. This could extend to a highly secure, AI-enhanced, and private Apple HomeKit home security service designed to safeguard these devices, which some speculate the company may unveil later this year.
