Rumors have been swirling of potential plans for a hardware subscription service from Apple, but would this create more value for investors?
Reports emerged on Thursday that Apple (NASDAQ: AAPL) is considering introducing a hardware subscription service to its customers as early as the end of this year. This would allow customers to avail of new products, such as an iPhone, by paying a monthly fee similar to how many already pay for apps.
This would mark a first foray into the realm of automatic recurring revenue for hardware products from the Cupertino-based company, which currently only makes recurring revenue from digital services.
Why would Apple develop a hardware subscription service?
The answer to this question seems relatively simple — consistent recurring revenue. Hardware currently makes up the bulk of Apple’s total sales, with services only accounting for 18.7% of revenue for 2021. The iPhone alone accounts for over 52% of total sales for the firm. Despite sales of these products continuing to be prodigious, they are far from guaranteed.
This week alone we saw Apple have to pare back production of its budget iPhone SE and its Airpods due to weak demand. Geopolitical issues and rising inflation have taken their respective tolls. While there’s little Apple could do to predict some of these events, having even a proportion of its sales guaranteed through a subscription service could have offset potential losses.
What does this mean for Apple investors?
Most would consider this quite a positive sign for Apple. It’s extremely unlikely that the firm would move entirely to a subscription model, meaning that current revenue-generating methods would remain intact. It would simply add another feather to the cap that is Apple’s revenue stream — not that it really needed any more help.
There is already precedence to show that consumers are happy to engage with the concept of spreading the cost of a significant purchase over a number of months or years. In fact, Apple has already offered such a service through its iPhone Upgrade Program in conjunction with Citizens One Personal Loans. This new service would likely supersede that, however, with Apple taking all aspects — including the finance — in-house.
It’s important to note that these reports are still relatively speculative. No concrete facts have emerged and Apple has declined to comment on its plans. However, CEO Tim Cook has spoken about the prospect of a hardware subscription before. During the company’s 2019 earnings call he was questioned about its feasibility. He responded by stating,
“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, so to some degree that exists today.”
While that was certainly no admission of the company’s plans, it did potentially speak to a willingness to engage with the idea once it made financial sense for the company. With the last number of years offering very little other than a highly uncertain and volatile market, a move towards more recurring revenue could work to safeguard Apple against any mass fluctuations in consumer sentiment.
Overall, for investors, these reports should be welcomed. If true, this has the potential to offer a new form of revenue, act as a protective measure against volatility, and displays a continued dedication to innovation even outside of Apple’s products themselves.