Apple’s market capitalization now stands in the $500 billion range, although it was over $700 billion at one time. Talk of the iPhone maker becoming the world’s first $1 trillion company has faded… along with its stock price. Indeed, any hardware company faces an uphill battle, particularly at a time when more and more tech companies are adopting subscription-based strategies.
Apple as a service?
But what if Apple could bundle its hardware into a subscription-based offering? Bernstein analysts have an interesting suggestion and believe that such a strategy could give the iPhone maker the boost it needs to become the first $1 trillion company in the world. The company is already dipping its toe into this pool with the iPhone upgrade program and monthly subscription services like Apple Music, but Bernstein analyst Toni Sacconaghi, Jr. argues that it could do more, dubbing his strategy “Apple as a service.”
A decade ago, no one talked about tail risk hedge funds, which were a minuscule niche of the market. However, today many large investors, including pension funds and other institutions, have mandates that require the inclusion of tail risk protection. In a recent interview with ValueWalk, Kris Sidial of tail risk fund Ambrus Group, a Read More
This phrase isn’t exactly a new one, although this particular usage of it is somewhat new. Past ideas around the “Apple as a service” idea include a world in which the company keeps adding subscription-based services like Apple Music. For example, the company has long been rumored to be working on a streaming TV service, although we haven’t heard anything on this front for a while, possibly because management may be having difficulties striking the deals that are needed in order to offer anything like this.
Goldman Sachs is one firm that has suggested this concept, although there have been other firms that have examined Apple’s service revenue and highlighted it as the next area of major growth.
Could Apple bundle hardware in a subscription-based model?
Sacconaghi suggests that Apple could bundle a family package with three iPad Minis, one iPad Air, and three iPhones, with the iPads on a three-year replacement cycle and the iPhones on a two-year replacement cycle. He suggests a price of $140 per month for such a bundle and says that services like Apple Music and iCloud storage could be added in. Also he said the rumored streaming TV service could be an important element in driving a shift in mindset among consumers, and while there is little precedent for a strategy like this pertaining specifically to hardware, he thinks Apple could pave the way.
Another key to success is the company acting like Amazon with its Prime service in terms of continually adding new benefits and services to make Prime more and more attractive. This week the online retailer announced plans to add even more to its subscription-based Prime offering.
CNBC’s Jim Cramer agrees with Sacconaghi’s idea and that it could be what the iPhone maker needs to push its market cap up over the $1 trillion mark.
Not a good idea for consumers
However, it’s worth considering whether families will really want yet another monthly bill, particularly one that’s as high as $140 per month. It’s one thing to add a $10 per month subscription to Netflix into a household budget, but another entirely to add $140 per month. Of course this would offer another option to people who feel like they must have the latest gadget all the time but don’t want to save up for it, but any time you pay for hardware in installments, you run the risk of defaulting. Hardware, particularly phones and tablets, is inherently different than software because companies can’t just cut off service to someone who stops paying because they lost their job or suffered some unforeseen personal financial crisis.
Whereas consumers could put off buying a new device if they come upon a financial hardship, dealing with a monthly bill is much more difficult. Consider the similarity with the rent-to-own business, which is notoriously predatory in nature as it takes advantage of consumers who want something but really can’t afford to pay for it. Remember the 2007-2008 mortgage crisis when consumers were encouraged to buy homes they couldn’t afford?
On the flip side, the wireless industry in general has already moved in this direction with some carriers like Verizon pushing mobile subscribers hard to pay for their phones in monthly installments rather than paying the full up-front price all at once. In this instance though, the devices are bundled with wireless service that can be shut off if the user stops paying. And with Apple’s current iPhone upgrade program, the company could withhold an upgrade to a consumer who didn’t pay for the full term.
So could Apple bundle its devices in a way like Bernstein wants to see? It might be able to, but is it financially wise for most consumers to eat such an offer up? Probably not.