Apple Subscription Trend
Two weeks ago, I was discussing with our Advisor team here at DWM my belief that cellular phones and automobiles will one day move towards a subscription model rather than focusing on outright purchases. I believe the subscription model will be disruptive to the industry and one needs to price stocks in these industries on the assumption that this will occur.
It's no different than software purchases at this point. Software is generally sold now by companies like Microsoft and Adobe as a subscription offering rather than a purchase of a standalone software product. Other companies are following this path.
CNBC coincidentally came out with an article that coincided with Apple's release of earnings outlining the likely move by Apple towards a subsequent subscription plan. Here are a few excerpts from that article:
Apple investors have speculated for years about the possibility that Apple could sell hardware, like the iPhone, on a subscription basis. It’s been a hot topic of conversation among analysts because investors tend to value the predictability of recurring revenue.
Under the argument for an iPhone subscription, which some people refer to as Apple Prime (named after the Amazon program of the same name), Apple would bundle hardware upgrades with services such as iCloud storage or Apple TV+ content and hardware for a single monthly fee. This would let the company switch iPhone sales from a transactional model to a subscription model, potentially driving the stock price up without having to increase product sales or prices dramatically.
When analyst Toni Sacconaghi asked about the idea of a prime subscription, Apple CEO Tim Cook did not shoot down the idea. In fact, he suggested that something like it was already in effect. ″In terms of hardware as a service or as a bundle, if you will, there are customers today that essentially view the hardware like that because they’re on upgrade plans and so forth,” Cook said during an earnings call. “So to some degree that exists today.” Cook went on to say, using bullish language, that Apple sees it as a major growth area. “My perspective is that will grow in the future to larger numbers. It will grow disproportionately,” he continued.
In 2015, Apple started to let people pay for iPhones on a monthly basis instead of all at once, throwing in a warranty and upgrades as part of the deal. The iPhone Upgrade Program bundles Apple’s AppleCare warranty and up-to-date hardware. Users can upgrade to the newest iPhone after paying for 12 months.
In recent years, Apple has also heavily advertised trade-ins, like auto dealers. Customers buying a new iPhone from Apple can sell their old phone back to Apple for what effectively turns out to be a discount on a new model.
Source: October 30, 2019, CNBC.com article by Kif Leswing
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