Apple plans to take a big bite out of the recurring revenue pie. Earlier this month, the company announced that its 6S and 6S Plus iPhone models would soon be available through a monthly payment plan directly with Apple, officially named the iPhone Upgrade Plan, with plans starting at $32/month and an upgrade offer every 12 months.
Apple may have made headlines earlier this year when the company moved its music business to a pay-as-you-go model with Apple Music, but this latest announcement indicates that Apple is ready to dive head first into expanding its recurring revenue models. This new payment option will allow Apple to establish a more predictable revenue stream for years out, while also fortifying its brand loyalty by tethering customers to more frequent upgrades, and on an affordable basis.
The iPhone is the heart of Apple’s business, accounting for over half of the company’s revenue. While shares saw an initial uptick (Apple finished the week 4.5% up after the announcement), the bigger difference will come in the future. Analysts in a recent Barron’s article assert that shares could appreciate by 50% in the coming year if the leasing program proves popular. Some have even called the program a potential “game changer” for Apple’s stock.
At Aria, the announcement and Wall Street’s reaction does not come as a surprise. Time and time again, we’ve helped companies like Adobe, Audi, and many others move to recurring models and then reap the rewards from Wall Street. The move is a smart, short- and long-term investment in their customers and their business.
Apple, like many successful companies before it (think Netflix), had to disrupt or be disrupted. As a result, it created the iPhone Upgrade Program, which is designed to tackle slowing iPhone growth in the market. Today, the upgrade cycle for the iPhone has jumped from 22 months to 26 months since 2013. Offering an upgrade every 12 months (which is essentially the time it takes for Apple to release a new model) can potentially reverse that slowing trend. The iPhone Upgrade Program also allows Apple to compete against and disrupt the wireless carriers, all of which offer installment plans for iPhones. Apple maintains an advantage with its 250+ stores, which offers better retail experiences than individual carriers and keeps customers close to other Apple products. The leasing program provides another disruptive element, unlocking phones so customers can move between service providers as they please without dealing with contracts and carrier-specific phones.
The bet Apple is making is in the long-term value of its products to customers as they becoming increasingly mobile in all facets of life.
The math also holds up. Without going into all the details (you can find that here), Apple stands to increase its gross margin year over year with the iPhone Upgrade Program. The initial increase grows from 50% to 55% after the first year. The big difference, however, comes in the second year, after the customer exchanges an old phone for a newer model. The gross margin swells to 65% because Apple can refurbish and resell the old phone. All totaled, when averaged over the two-year time frame, Apple comes away with a 60% profit margin. And that doesn’t even account for all the cross- and upsell opportunities and other promotions in that time.
Better phones, loyal customers, stronger year-over-year margins. What else could customers and investors want?