Here's How The Economics Of Hardware Subscription Can Boost Revenue For Apple

Apple, Inc. AAPL is reportedly toying with the idea of launching a hardware subscription service, which will likely be a "win-win" proposition for all parties involved.

Cupertino is driven in this pursuit by the simple objective of making more money, Bloomberg columnist Mark Gurman said in his weekly "Power On" newsletter.

Apple Loyalist Vs. Apple Users: Currently, only "die-hard" Apple fans upgrade to new iPhones every year, while most other users upgrade only when they feel it is necessary, Gurman said. The Apple specialist estimates that an average iPhone user upgrades the device once in every three years. This is less frequent than a decade ago, when carrier promotions drove sales every two years, he added.

Apple, therefore, makes about $825 from a typical Apple user once every three years, with the amount being the average selling price of an iPhone, Gurman said.

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Why Apple Is Leaning Toward Subscription Service: With a subscription service, Apple can increase the amount from $825 to over $1,000 and also get the old phone back to sell on the secondary market, Gurman said.

For the iPhone 12, Pro and Pro Max, priced at $799, $999 and $1,099, respectively, a monthly subscription could work out to $35, $45 and $50, the columnist said. Over a three-year period, Apple can make $1,260 from the iPhone 12, $1,620 for the Pro and $1,800 for the Pro Max, he added.

While Apple is suddenly able to generate significantly more money per consumer, customers benefit because they may not have to shell out hundreds of dollars upfront for a new iPhone, Gurman explained. As a sweetened offer, Apple users get the latest model once every three years, he said.

Gurman sees Apple making additional money if the program is tied to its high-margin Apple One digital services bundles and AppleCare.

Even at a lower per-month subscription, Apple still benefits as it can make money from selling the steady influx of older phones, the columnist said. Assuming users in this program stick around for a decade or more, Apple can get $4,000 in revenue per customer per decade in the $35-per-month scenario, he added.

The iPhone hardware subscription, according to Gurman, is more like a lease, as a user is paying off a portion of the value of the iPhone, but never fully owns it. And when a new version comes out, the old phone can be replaced, he said.

Apple closed Friday's session down 0.17% at $174.31.

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