Apple’s subscription strategy

The more things roll on, the more we see that Apple is becoming a services company. We’re not at the point where services revenue and strategic importance have overtaken products, and in fact I’d guess we are still a few years away from that. Apple is, and has always been, fundamentally a hardware and software company culturally.

However, we are seeing things like iPhones being subsidised on payment plans, trade-ins for large discounts on new hardware and price adjustments have been hinted at during the results conference call to re-look at prices outside the US that are currently too high because of currency variations. It’s also important to remember these items are not small ticket either. An iPhone XS costs a thousand dollars (sans tax) US for the entry-level model. Apple’s entry-level portable Mac, the MacBook Air, is only $100US more.

In pushing my thinking to an extreme, I’m wondering at what point would services revenue per user over lifetime allow Apple to offer for free, or a small outlay, its devices? Clearly this line of thinking is current and trending in an industry that has typically sold stuff and forgotten about its clients, coming full-circle to today’s model of offering hardware cheaply and requiring a recurring revenue, thus obliging thinking around ongoing value.

Let’s look at an example.

In the printing industry, HP has consistently over the years reduced the price of its hardware to levels that are frankly ridiculous. You can pick up a LaserJet printer for around $100US with a discount of $20US currently. Laser printers used to cost many hundreds of dollars, with even its entry-level mono LaserJet 1000 costing around $250US in the year 2000.

Of course some of the cost reduction is due to manufacturing and supplies getting cheaper, but it is mostly telling of a strategy by HP to reduce upfront costs and hook you with ongoing revenue from ink/toner. What costs many times the buy in price of the printer over its lifetime is not the box itself, its the toner. Additional, HP developed lock-ins to ensure its buyers kept purchasing refills from them rather than the many companies that sold refills.

This is pretty much the strategy I can see Apple executing in the future to ease users into purchasing locked-in services that subsidise the hardware costs over several years.

Could it work economically? That depends on many factors, like average lifespan of devices, buying patterns of end users and the lifetime spend of services.

2 February 2019, F.W.I