Apple should evolve its business model with the iPhone 15

Apple has set the smartphone and investment industries alight for years with oversized returns thanks to high hardware margins, strong repeat customer business, and excellent investor relations. Yet, the volatility of its share price – losing as much as $200 million from its market cap in just a few days – and increasing competition in every market proves that the Apple bubble has the potential to burst at any given point.

Yet, the company has an ace up its sleeve. It’s the biggest ace that every other manufacturer is clamoring to grab a piece of. Apple’s latest financial earnings showed that the profit from its subscription revenue outpaced the gain from its hardware division, and it’s clear that Apple’s next magic act could be its best yet.

Subscription, not hardware, is Apple’s future

Four years ago, I talked with Emil Protalinski about Apple’s future, and I strongly suspected that Apple would go the obvious route of building the ultimate Apple bundle. 

Think about an Apple bundle for a moment: the company is no stranger to subscriptions and bundles – the Apple One plan already bundles all of its subscription services, and it offers an Upgrade Program offering you a new iPhone every year. A bundle that combines all of its products into one could be its best-selling product ever.

Subscription revenue has been growing steadily, and the next act of Apple's financial performance could be its best yet.

The iPhone generates higher average revenue per user (ARPU) for everyone involved in the ecosystem, and no Android manufacturer – or PC maker – comes close. Apple inspires a level of loyalty from its users that is the holy grail for all technology companies, and the recent rise of its subscription revenue proves that the company can lock people into long-term agreements with the promise of saving money and better products.

Why an Apple all-inclusive bundle makes sense for Customers

I love Android devices, but for years, I’ve always had an iPhone in my pocket alongside whichever product I am reviewing – or, more recently, the latest foldable phone to take my fancy. There are numerous reasons, mainly because certain apps are only available – or are better optimized – for the iPhone, and Apple’s ecosystem is the best bar-none.

Yet, it gets costly to acquire Apple devices every year. Unlike the latest Samsung devices, where you can recoup large amounts each year by trading in last year’s model, you can lose 20-30% each year when upgrading to the new iPhone and trading in the old model. It’s considerably more when you look at the Apple Watch (closer to 50%) and the MacBook range. The latter, especially, can see you lose over 70% of its value.

The move to Apple Silicon means you can no longer rely on your expensive MacBook retaining its value once the next generation of chipsets is launched.

Yes, there are ways to improve the value, but you can lose a considerable amount even when you sell devices privately – versus trading them into Apple. 

In 2021, I spent over $4,000 on a new MacBook Pro 14 with M1 Max. Earlier this year, I sold it for just $1,400 in a private sale. The MacBook Air with M2 is another example; my model cost $2,200, and a little over a year later, Apple offered just $850 for it at trade-in. 

Regardless of the computer you buy from Apple, the move to Apple Silicon means that the days when it would retain a large amount of its value are behind us. 

Thankfully though, Apple has a ready-made solution, and it should appeal to a supply-chain specialist like current CEO Tim Cook.

Think of the iPhone Upgrade Program: you pay a monthly fee for two years, and after the first 12 payments, you can trade the phone into Apple, which will forgive the rest of that loan as long as you sign up for a new iPhone Upgrade Program loan. The net result? Customers are committing to upgrading to the new iPhone every year. 

Apple doesn’t reveal how many customers upgrade through their program every year, but even if a customer has hit financial difficulty – as might occur during the recession we’re all expecting at some point – most customers will probably still upgrade as they’re already locked in for the following 12 months regardless. As such, customers who were previously upgrading every other year, or even less frequently, are suddenly upgrading yearly.

For years I worked with customers in retail and far too often saw the same trend: customers would justify taking out programs that were more expensive over time in favor of less upfront cost and the perceived “freedom” to upgrade. In reality, however, all these programs do is lock customers in, which is precisely why Apple should pursue an all-inclusive bundle for all its devices.

Why an all-in bundle makes sense for Apple

For Apple, it solves a problem that will continue to grow for the company: hardware sales and missed targets and how they impact the share price as investors become wary. Rather than the current rollercoaster that Apple’s share price goes through (albeit ultimately continuing to grow), it allows Apple to obfuscate the underlying individual numbers and instead focus on a new key metric: how much it generates through subscriptions.

Further, offering an all-inclusive subscription guarantees that Apple could get customers to spend more money over time. That MacBook you bought two years ago? You may be looking longingly at an upgrade but find the cost prohibitive, especially with trade-in values being what they are. 

Crucially, Apple currently faces the ebbs and flows of the seasonality of its product and has so far tried to solve this by launching new Macs during WWDC in June, iPads in the first quarter, and even an iPhone with new colors during the early part of the year. Yet, the share price doesn’t spike near as much as during its strongest launch: the iPhone.

A monthly subscription that guarantees you a new Mac, Watch, iPhone, and iPad every single year? That's highly compelling.

Rather than focus on finding new smash-hit products every quarter, Apple could utilize promotions, increased advertising, and other methods to sell hardware bundles. Further, the efforts of one quarter will compound in a way that consistently ensures its subscription revenue never drops, only increases. As such, its investors and the market will likely approve of the new strategy.

Why now?

The launch of the iPhone 15 series is the perfect time to launch an all-inclusive bundle for several reasons. First, the company recently partnered with Verizon (in the US) and EE (in the UK), as well as carriers in other countries, to launch custom postpaid plans that include the Apple One bundle of services (Fitness+, Arcade, TV+, News and iCloud storage). 

Every new Apple product will ultimately serve as a vessel to increase its overall subscription revenue and tie more and more people into the ecosystem for years to come.

Second, a few months ago, Apple launched the new Mac Pro, which had – until that point – been the only Mac still powered by Intel processors. Making such a switch to an all-inclusive bundle while still having Intel-powered devices would have been cost-prohibitive. Doing so with Apple Silicon-powered machines should be far more feasible, with early estimates suggesting the M1 processor cost just 25% of the per unit pricing for Intel’s Intel Core i5 processor.

Third, the iPhone 15 Pro and Pro Max will represent the most significant shift in the iPhone for years. Thanks to an EU mandate, Apple’s top-end phones will now be powered by USB-C, offering an excellent opportunity to unveil a new business model. 

Fourth, it also represents an opportunity for Apple to increase adoption of the Apple Card, either through offering a promotion to Apple Card users (say 5% cashback versus the standard 3% back) or by mandating it as a requirement, which is far less likely, but better for the company in the long run. This would also have the added benefit of making the Apple Card more appealing to potential partners, as well as current partner, Goldman Sachs, who has reportedly lost over $1 billion on the Apple Card since its launch in 2019. 

Apple has repeatedly proven that it can weather changes in the markets and launch new products that are evolutionary rather than revolutionary, yet continue to make a lot of money. The ten-year return for Apple investors is 30.42%, outpacing every other company in that period, yet there’s still volatility in its share price.

What better way for Apple to remove this volatility than by launching a bundle that ensures all new products will be additional spikes to an ever-growing subscription revenue number?