To The Moon

$Apple(AAPL)$Apple Inc. is working on an iPhone hardware subscription service that will shake up the buying process, letting users essentially lease their device and get a new model annually. As with other services of this nature, Apple’s rationale for doing this is very simple: making more money.

Right now, it’s only really diehard Apple fans that get new iPhones every year. Most consumers only upgrade when they feel it’s necessary. A few common reasons:

The screen is cracked, and it’s actually more sensible to buy a whole new device.

The phone is so old that it can’t run the latest iOS or hot new app.

It’s time for a bigger screen or more storage.

And, yes, sometimes a new iPhone design is enticing enough to seem worth it.

The average iPhone user upgrades the device every three years. That’s actually a less frequent rate than about a decade ago, when carriers pushed subsidies and discounts every two years.

According to Counterpoint Research, the average iPhone sales price is about $825. That means Apple is generating a bit over $800 from the typical iPhone customer every three years.

That’s exactly why Apple is working on a subscription service. What if it could boost that $800 to north of $1,000 and get the old phone back to sell on the secondary market?

Apple can. Let me break it down. I’ll use the starting prices for the iPhone 13, Pro and Pro Max—$799, $999 and $1,099—and pick monthly price points of $35, $45 and $50 as examples (I chose these levels because they undercut the pricing of the old iPhone Upgrade Program by a few dollars—more on that below).

Here’s how much Apple would generate over three years from the monthly subscription compared with the upfront price:

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

This is obviously just back-of-the-envelope math, but Apple is suddenly able to generate significantly more money per consumer. And the benefit for customers would be not having to shell out hundreds of dollars upfront for a new iPhone. They’d also get the latest model every year instead of every three years.

The company could make additional money if the program is tied to its high-margin Apple One digital services bundles and AppleCare.

Even if Apple charges less per month than my suggested levels, it will benefit from the steady of influx of older phones, which it can turn around and sell again. The company also generates 40%-plus margins on iPhone hardware, so it’s a lucrative business to expand.

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.

The other question that many readers have asked is how this program would differ from the iPhone Upgrade Program or carrier installment plans. The best comparison I can think of is financing versus leasing a car.

When you finance a car, you are paying off the entire price of the vehicle over, let’s say, 72 months. When your payments are done, you now fully own the car and it’s yours to keep. When you lease a car—perhaps over 36 months—you’re paying the dealer a portion of the vehicle’s value, but you have to give it back when the term is over.

The iPhone Upgrade Program and carrier installment plans rely on the financing approach, as you are spreading out the cost of the iPhone over 24 months. Once you’re done paying off the device, it’s yours for good. One wrinkle, however, is you can swap out the device, if you so choose, once you’ve paid off half of it (after 12 months).

The iPhone hardware subscription is more like a lease because you are paying a fee that is not simply the cost of the iPhone split up over two years. You’re paying off a portion of the value of the iPhone, but you never fully own it. And you can replace it when a new version comes out—just like with a car lease.

Definitely can hit 3 trillion market cap.

@TigerObserver@TigerEvents