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Tim Cook Expects More iPhones Sold by Subscription

With all the new services Apple (NASDAQ: AAPL) has released over the past year, investors have been wondering if Apple will ever roll them all up into one package.

The tech company is starting to make some moves to make what some are calling "Apple Prime" a reality. It's launching Apple TV+ with a free year for anyone who buys an Apple device this fall. This week it announced that students subscribed to Apple Music will also receive Apple TV+ at no extra cost. It also said customers who buy an iPhone on their Apple Card will get 0% financing for 24 months.

On the company's fourth-quarter earnings call, one analyst asked CEO Tim Cook if Apple hardware would ever be part of a bundled service offering.

"It's not part of a broader pattern," he said, tempering expectations. "Although I wouldn't want to rule out for the future that we might not see another opportunity at some point in time," he added.

But he did note that expectations for customers paying for their iPhones in installments directly from Apple through its iPhone Upgrade Program or Apple Card financing "will grow disproportionately" to overall iPhone sales. "And one of the things we are doing," he said, "is trying to make it simpler and simpler for people to get on these sort of monthly financing kind of things."

As Apple focuses more on selling the iPhone as a subscription, it could ultimately lead to the bundle investors have been clamoring for.

A line of iPhone 11s in various colors.

Image source: Apple.

Why iPhone as a subscription matters

Tying the iPhone to a monthly subscription does a couple of things. First and foremost, it locks the consumer into the Apple ecosystem with a monthly commitment. Whether the payment goes directly to Apple or to Apple through the new Apple Card financing option, subscribers will have to interact with the tech company every month for a relatively long period.

Moreover, subscriptions obfuscate the true cost of the iPhone. iPhones are expensive. Starting at $700, that's a big commitment. And with hardware that's increasingly difficult to make obsolete, consumers don't have as much incentive to upgrade to the latest iPhone every year. So instead of paying $700, many have opted to wait until next year ... indefinitely.

But as a subscription, that cost is more digestible. The iPhone Upgrade Program starts at just $35 per month and includes AppleCare -- another bundle. That might encourage consumers to buy a more expensive device as well. The program also encourages subscribers to ignore the value of their trade-in when they exercise their upgrade option at 12 months, further obfuscating the cost of the iPhone.

As such, customers paying for their new iPhone in installments ought to produce greater customer lifetime value than those buying their phone with cash, because they're more likely to upgrade their device more often.

Bundling would increase customer value even more

Apple could see bundling as a way to further increase the value of its customers. Offering a free year of Apple TV+ to new device purchasers, for example, should produce value for the company in the long term. Offering 0% device financing through the Apple Card should encourage consumers to use the Apple Card for other purchases as well, further benefiting Apple in the long run.

With a growing number of services, Apple has a lot of opportunities for bundling. Importantly, Apple TV+, Apple Arcade, the iPhone Upgrade Program, iCloud, and AppleCare are fully controlled by Apple in that it doesn't have to deal with licensing fees from other parties. 

Negotiations around music royalty rates are reportedly what held up an Apple Music and Apple TV+ bundle. Apple also has a revenue share agreement for Apple News+, which could make bundling the service more complicated.

But putting the iPhone at the center of a bundle should produce higher customer value for Apple. Apple TV+ and Apple Arcade, in particular, benefit from greater scale, since Apple has fixed content costs for both services. And more consumers may be interested in trying Apple's services if they're given incentive through a bundle. Furthermore, bundling consistently shows greater subscriber retention than standalone subscriptions across industries. If Apple wants to sell more iPhone subscriptions, a bundle makes a lot of sense. 

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