How Apple Could Benefit From Moving To Hardware Subscription

With a recent report suggesting Apple, Inc. AAPL is working on a subscription model for its hardware products as early as late 2022 or 2023, an analyst at Morgan Stanley looked into the feasibility, viability and utility of the option.

The Apple Analyst: Katy Huberty has an Overweight rating and $210 price target for Apple shares.

The Apple Thesis: In the eventuality of transitioning to a hardware subscription model, all purchases will be tied to Apple user IDs, rather than phone numbers or credit/debit card accounts, Huberty said.

A pivot from selling hardware products in the traditional "price-times-unit" model to monetize Apple's more than one billion user base through bundled monthly subscription offerings could drive meaningful upside for the company's stock price, the analyst said.

This shift to the new model may not come in the coming months, Huberty said. An average Apple user's willingness to pay for access to their Apple devices and services is meaningfully higher than $1 per day they spend currently.

The subscription model, the analyst said, will be different from the installment plans the company offers currently. Unlike the installment plans that would require paying roughly $30-$40 per month for the iPhone over 12-14 months, under a subscription model an Apple user would pay a certain price per month perpetually to gain access to their device, she added.

Related Link: Why Apple Has 'Little To Lose, A Lot To Gain' By Expanding Its Services To Android Devices

Huberty expects Apple's subscription offering to have multiple, different pricing tiers, like the base option giving a user access to a new legacy iPhone every month, and a higher priced tier giving access to the newest iPhone model every 12 months. Apple can create a multitude of different bundles to be able to capture users' greatest willingness to pay based upon their consumption of Apple products and services, she added.

A subscription plan will help reduce hardware replacement cycles and increase spend per user, Huberty said. With a 100% subscription model, Apple will likely partner with third-party financial institutions to limit the credit risk it may have to put on its balance sheet, the analyst said.

Huberty sees the subscription option being potentially available only at Apple.com or an Apple retail store, leading more consumers to a direct-to-consumer model. This is in contrast to the mere 15% of the iPhone shipments, 30% of Mac/iPads and 20%-25% of wearables sold directly through Apple.com or one of its 518 retail stores currently, she noted.

Pairing a hardware subscription alongside an Apple One-type bundle will help to increase adoption of Apple's first-party services such as Apple Music, Apple Arcade, iCloud etc., the analyst said. This would not only help to drive stronger Services growth, but also reduce Apple's dependence on the App Store, which faces regulatory and legal risks.

AAPL Price Action: At press time, Apple shares were up 0.88% to $177.14.