Apple of the ‘i’ | The Subscription Playbook

In my co-authored article with Dean Rajendra Srivastava Indian School of Business, we argue that going the subscription way is a smart move for it benefits with recurring, more solid, loyalty-driven revenue streams while allowing to skirt the smartphone commoditisation issue and leveraging evolution of Apple as a service and ecosystem brand.

Top companies around the world are pivoting themselves in the wake of transformational changes led by technology advancements. The tech companies are naturally at the forefront of it mostly disrupting other legacy industries while sometimes challenging their own models to stay relevant.

Netflix pivoted itself from a niche DVD-by-mail service company to a streaming-led modern television network. Microsoft initially successfully positioned itself as a services company (clouds, ads, music) from a products company (windows MS office). Microsoft is today a productivity and platform company for the mobile-first and cloud-first world, pivoting successfully from a mere ‘devices and services’ company.

Examples galore. Google started out as a search engine and today is trying its hands to become a commerce company. Amazon, on the other hand, having dominated the e-commerce space, now is eying advertising revenues as a major fillip while trying to become a search company.

The Apple Turn

All this while, one of the most iconic companies out there has been inconspicuously placing its bets on a single product (iPhone) contributing as much as 65% of the revenues.

To be fair, after a disastrous proprietary Mac strategy, Apple has followed the paths of the likes of Microsoft and Google to create an ecosystem across its offerings and thereby create a customer lock-in via app-augmented generation of iPhones.

What has, till date, been missing from the Apple strategy has been a marked shift to subscription as a model. This, however, seems to be up for change. In a recent earnings call, Tim Cook said, “In terms of hardware as a service or as a bundle, if you will there are customers today that essentially view the hardware like that because they’re on upgrade plans and so forth. So to some degree that exists today.”

Apple has, since 2015, been allowing sales on a monthly payment basis with Apple care warranty and up-to-date hardware as part of the deal. While marketing it as part of its environmental efforts, Apple has also been promoting its trade-in model thereby laying the groundwork for a subscription model for some time now. Further opportunities exist with Goldman Sachs Apple Card free interest for 24 months on iPhone purchases. By spreading the cost of pricey iPhones across several months, Apple may indeed stretch its market access in price-sensitive emerging and growth markets.

Apple may finally have realised the power of the subscription model what with Salesforce, Netflix, Amazon, Spotify and others all-embracing the age-old model as the predominant revenue model driver.

With the predictability of recurring revenue, investor pressure seems to be mounting on Apple to switch from a transaction-based model to a subscription-based one. The bundling for Apple has the potential to offer several benefits – hardware upgrades, iCloud storage, Apple Arcade, Apple Music, Apple Pay, Apple TV+ premium content and of course the iPhone. With no dramatic increase in price or sales, Apple’s stock price could move north with such a move.

The Subscription Storm!

Across industries, smart companies have successfully reinvented themselves: GE with digital subscriptions such as data services, IBM offering IT and business subscription services, Tata Power’s recent ‘power-as-a-service’ foray, and M&M announcing its passenger vehicles on a subscription model. The trick lies in owning the consumers by aggregating and engaging them while monetizing these relationships.

With services and wearables which today account for 28% alongside the iPhone and what have you all bundled in, Apple’s price-earnings multiple could begin to drift towards the likes of Google and Microsoft – from the 20 or so to 30. Valuations remain a direct function of the increase in earning and the quality of these earnings. Subscription earnings are higher quality earnings for they are stable, safer, often contractual, recurring and ride out any market turbulence.

Going the subscription way is a smart move for it benefits with recurring, more solid, loyalty-driven revenue streams while allowing to skirt the smartphone commoditization issue and leveraging evolution of Apple as a services and ecosystem brand.

-------------------------------------------------------------------------------------------------------------

Note: Article as originally published in and reproduced from Fortune India, Feb 2020 co-authored with Prof Rajendra Srivastava.

You may also be interested in reading my other articles - links at the absolute bottom of this page.

Links to my author wall in Forbes.

Links to my author wall in Fortune.

Follow me on Linkedin and Twitter.