Hardware subscription model for iPhones – so crazy it just might work

hardware subscription iphone Apple
Image by ms_pics_and_more | Bigstockphoto

ITEM: Apple is reportedly making plans to launch a hardware subscription model for its iconic iPhones, where users pay for Apple services rather than the phone. While Apple hasn’t confirmed this, the idea isn’t as far-fetched as it sounds – not least because Apple potentially stands to make more money that way.

Apple has been looking for ways to boost its growing subscriptions business, and apparently thinks one way to do that could be to throw in iPhones as part of the deal. According to Bloomberg, the idea is that users can get an iPhone for free and pay a monthly subscription to use whatever apps are on it, as well as Apple services like iCloud, Apple Music, etc. Some bundle options could include Apple TV+ and services like Apple One and Apple Care.

Unlike its existing Apple Upgrade service – which is a lease-to-own model where you get to keep the iPhone after 24 monthly instalments – the iPhone hardware subscription model doesn’t allow you to eventually own the smartphone. But you can always change it to the latest model when it’s released.

As for the obvious question – can Apple make more money selling hardware subscriptions rather than selling the actual hardware? – Bloomberg’s Mark Gurman has done the math, and thinks the answer is yes.

The rationale goes like this:

To start, people don’t change smartphones that often. In the pre-iPhone days of 3G feature phones, users would buy new phones at least once a year. These days, the frequency for new iPhone purchases is more like once every three years on average – usually because the screen is cracked, the phone is too old to run the latest iOS upgrade or they need more storage or a bigger screen.

That means Apple is selling an iPhone to customers (at a current average selling price of $825) once every three years or so.

Gurman made up some prices to demonstrate the hardware subscription model – $35/month for an iPhone 13, $45/month for an iPhone 13 Pro, and $50/month for an iPhone 13 Pro Max. (Those monthly fees are a little lower than the Apple Upgrade program.)

Here’s how it works out, Gurman says:

iPhone 13 ($35/month): $1,260 over three years instead of $799

iPhone 13 Pro  ($45/month): $1,620 instead of $999

iPhone 13 Pro Max ($50/month): $1,800 instead of $1,099

So over the same three-year period, Apple is making considerably more money per iPhone. Customers get to use the latest iPhone model if they want, and Apple can resell older models with a lower subscription package, Gurman writes:

In the long term, Apple will be raking in much more cash than without a subscription offering. The iPhone has a fairly low attrition rate, and users in this program may very well stick around for a decade or more. That’s more than $4,000 in revenue per customer per decade—just on iPhones—in the $35-per-month scenario. 

Of course, at least some customers might prefer to own rather than rent. A hardware subscription model could also raise issues of where user data is stored, what happens to it when you change phones, and making sure the next person using that particular iPhone can’t access your stuff.

Also, a hardware subscription presumably won’t include the actual SIM card and data plan, which still has to be purchased from a network operator. Depending on how much a monthly plan is, users may not be keen to fork out extra money per month for the phone. In developing markets where Android smartphones are available for around $100, a $35/month subscription plan might have low appeal.

Anyway, it’s all speculative right now – Apple isn’t expected to make any kind of announcement about an iPhone subscription service until at least the end of this year, and it may abandon the idea altogether. In any case, hardware subscriptions might well be a game-changer – at least for Apple. Whether other smartphone OEMs follow suit is anyone’s guess.

1 Comment

  1. I’m pretty sure they are interested in this kind of model. And as the article also indicates, it can tie people even more to Apple’s ecosystem. All investors love monthly recurring revenue. I wrote earlier about the sustainability aspect of devices (http://disruptive.asia/smart-devices-market-unsustainable-how-to-fix-that/) and it is a very relevant question for this too. This can actually make it better or worse. It can lead people to get more often new hardware and throw away old, but if Apple is able to make a kind of proper re-cycling for the components, it can also help.

What do you think?

This site uses Akismet to reduce spam. Learn how your comment data is processed.