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An iPhone Subscription Could Be Huge for Apple's Service Business

You might be paying for everything Apple (NASDAQ: AAPL) has to offer with a single subscription in the near future. The tech company is reportedly working on hardware subscriptions for its devices, including the iPhone. Unlike installment plans, which Apple’s offered since 2015, the subscription would be more like a lease program with the option to upgrade devices periodically. An iPhone subscription service could provide a great complement to Apple’s existing subscription services with significant potential to bundle the service and lock customers into the Apple ecosystem.

Apple introduced Apple One in 2020. The subscription plan bundles Apple Music, Apple TV+, Apple Arcade, Apple New+, Apple Fitness, and iCloud. Plans start at $15 per month and could provide many iPhone users with significant savings.  Two-thirds of iPhone owners already subscribe to iCloud in some form, according to Consumer Intelligence Research Partners. Half of iPhone users have an Apple Music subscription, and one-third have an Apple TV+ subscription.

Adding an iPhone subscription to the bundle could make perfect sense. Apple could offer significant savings to its most loyal customers — those who upgrade their iPhone extremely frequently. It could also make it easier for customers to afford the chance to use the most recent iPhone. Instead of breaking up the cost of an iPhone into simple installments, Apple can instead charge customers close to the depreciation rate on a new iPhone over the course of the first year plus its cost to insure the device.

That would theoretically be less than the installment cost of an iPhone purchase with the potential for more frequent trade-ins. The downside is the customer never actually owns the device. On the other hand, about one-third of iPhone purchasers trade in their old device when purchasing a new one.

An iPhone subscription plan is already a good fit for many iPhone users. Bundling it with Apple’s other subscription services can help boost subscriber rates and usage, helping it scale its businesses, many of which have high fixed costs like Apple Arcade and Apple TV+.

An iPhone subscription can increase iPhone sales in a couple of ways. First, using a subscription model is a great way to increase customer loyalty. While Apple already has extremely strong retention rates, upgrade rates have lengthened over time. Giving iPhone subscribers the ability to upgrade more frequently than they might on an installment plan could increase annual sales of new iPhones.

Apple would receive old devices in return. It could recycle them for parts — an opportunity unique to Apple — or refurbish them and sell them to retailers, carriers, or directly to customers. Doing so would help the company recoup much of the cost of the device and make a meaningful profit on the subscription program.

Ideally, the subscription program is just as profitable for Apple as selling an iPhone outright. Additionally, more refurbished devices can put more affordable iPhones into the market as well for customers interested in older models, increasing the user base for Apple.

Moreover, selling a subscription at less than the cost of installments for an iPhone can attract customers who were previously priced out of owning an iPhone or owning the iPhone they really wanted. That can help it penetrate markets where consumers are more price-sensitive and have less disposable income.

While the iPhone remains the center of Apple’s business, generating over 50% of its revenue, the company has been putting a focus on its services business for years now. An iPhone subscription has the potential to highlight this transformation as Apple looks to make the iPhone as accessible as possible in order to grow its services. 

If executed properly, the tech company can do that without negatively impacting the profit margin of selling iPhones thanks to its ability to recycle and refurbish old devices. The upside is more device sales and more service subscriptions, producing greater revenue and profits for investors.

This article was written by Adam Levy from The Motley Fool and was legally licensed through the Industry Dive Content Marketplace. Please direct all licensing questions to [email protected]

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