Apple is reportedly working on a subscription model for iPhone and other hardware products. The news made headlines across the tech world. Apple’s influence and strength position it to effect a dramatic shift in the way smartphones are sold. A hardware subscription model comes with its own set of opportunities and challenges. While Apple is most equipped to implement such a plan and become immune to industry challenges, others may find it hard to replicate.

A hardware subscription should not be confused with hardware financing or Apple’s annual upgrade program offered in the US — the key difference here is “ownership”. Apple already offers device financing plans in many regions and some carriers also offer the option to lease the device for two years (after which the consumer is expected to return the device or pay the residual value). The value proposition for Apple lies in driving higher stickiness within its ecosystem while enabling faster upgrades. Therefore, bundled subscription plans with the option to pick and choose more than one hardware and service product will give a big boost to Apple’s “power users” which generate a much higher monthly ARPU across the brand’s products and services.

Hardware subscription model: Kill many birds with one stone

Hardware subscription can potentially make Apple immune to key challenges faced by the industry.

Firstly, replacement cycles are getting longer with hardware improvements. The average replacement cycle for iPhone users has increased to more than 30 months. The users are holding on to the devices longer because of their great quality and Apple supporting multi-year updates (at least 3-4 years). Since Apple cannot scale back on this value proposition, which is good build quality and software, it has to find newer ways to increase iPhone sales. Hardware subscription is one way to make sure users upgrade to the latest and greatest devices more frequently.

Secondly, the average selling prices (ASPs) have stabilized. Note that iPhone is not the most expensive smartphone in the market anymore, as it was 4-5 years back. A hardware subscription will allow Apple to minimize the cost of entry for a new user, enabling the brand to target higher ASPs.

Thirdly, Apple’s service revenues have seen significant growth but still accounted for 15.7% of its revenue for Q4 2021. Apple realizes that a “power” iPhone user can generate a much larger “customer lifetime value (CLV)” over a period of time if locked into a subscription bundled with services. According to Counterpoint Research Ecosystem Analysis, Apple can potentially generate a monthly ARPU of ~US$400 or an annual revenue of ~$4800 from a “power user” subscribing to its latest hardware, software and services. Apple’s bundling of services with hardware subscription will guarantee long-term subscription to Apple services with a stable revenue stream and outlook. Note that equity markets hate elements of uncertainty and a stable outlook is highly desired.

Monthly ARPU (Hardware + Services) for Apple Power User ~400

Source: Counterpoint Research Ecosystem Analysis, 2021

Fourth, the smartphone market structure is different across countries. There are three typical models – open-channel market, carrier-driven market with device subsidized and carrier-driven market with device financed. While carriers play a significant role in keeping the smartphone cost down in carrier-driven markets, consumers pay full price upfront in open channel markets. Although third-party financing options are emerging in open channel markets, the uptake for such services is still limited. We believe that the hardware subscription model will have less impact in markets where devices are already subsidized through carriers. But a subscription model will also bring all three types of markets on a level playing field, minimizing the cost of entry and giving another boost to the iOS installed base.

Last but not least, the hidden element and the most promising gameplay here could be a stronger hold of the secondary market, i.e. smartphone’s second life. At present, the refurbished smartphone market is dominated by Apple devices but the whole value chain is heavily segmented. Apple devices manage to grab an attractive value for used phones as well. With power users upgrading more frequently through Apple, hardware subscriptions will complete a full circle, creating an opportunity for Apple to extract full value from the end-to-end device lifecycle. It will enable Apple to control the whole refurbished value chain (right from device collection, grading, repair/refurbishment to resale) and potentially put Grade A devices back into the hardware subscription cycle as refurbished devices. This will also be in line with global sustainability initiatives and boost Apple’s original spare parts program.

Key Implications

Apple’s hardware subscription plan can have a multifold impact across different market elements. Overall, some mobile network operators won’t entirely welcome the news, but this was inevitable. Equity markets will be very happy to see a strong and stable revenue outlook.

Further, end-to-end control of buying and selling experience of hardware, software and services also opens the door for many other opportunities. eSIM and availing financing in-house means it now owns a critical (and previously painful) part of the customer journey.  The initiative dubbed as “breakout” mentioned Apple targeting payment processing, credit checks and many other fintech services. A hardware subscription will lock premium iOS users, allowing Apple to monetize daily financial transactions through a range of its possible fintech products.

A subscription model will establish a stronger relationship with premium iOS users with more frequent transactions compared to the existing one-time purchase transaction. This will have a multifold impact across Apple’s existing and future products, driving a much higher dollar value relationship with its user base.