Why Apple decided to create a subscription model and how this will revolutionize the mobile market

The move from pay-to-own to pay-to-use is one of the big new consumer trends, boosted by the changing needs of the younger generations. The pay-per-use concept is actually not that new and has been applied in the housing market for long. Renting an apartment was much common in the twentieth century. Car rentals and leasing have been around for some decades as well. As business leaders we need to get ready to see this formula applied to other consumer goods industries. And some are there to take the lead. Let’s take the mobile business, as an example of how decisions are taken and new business models built.

Apple will surprise us at the end of 2022 or early 2023 with a new subscription service: a monthly recurring payment for the iPhone and other hardware products. Is it new? Apple already offers the iPhone Upgrade Program in some countries, which allows users to pay for a new iPhone over 24 monthly installments with the option to upgrade their phone after 12 months. The current program is technically a loan financed by a third-party bank, requiring a separate credit application with payment info and billing. The payment is done directly to a financial institution and not to Apple. With the subscription solution this process will be totally seamless.

How did Apple come to this decision?

iPhones have become more and more expensive. The trade up is less compelling since nowadays there is no big jump in performance between one or even two generations of mobiles. Slower technological improvements have lead consumers to upgrade their phones less often than in the past. This decline in upgrades is especially marked in developed markets and this could hurt the company profits down the road.

I believe that the smartphone era is fading and the next big thing will be virtual reality headsets (meta verse will further accelerate this trend), like augmented reality glasses and similar appliances. This will be the new fancy products! These new markets will get soon very crowded with Apple, Google, Meta and Microsoft. Plenty of wearables will be playing as “accessory” to the phone, converting phones into a hardware back office, the one giving power to the rest of the gadgets. As this new era unfolds, securing the phone subscription will bring loyalty to the phone and a consumer base to expand services and other new gadgets. In other words, this subscription will turn into an additional competitive advantage for Apple vs Microsoft, Meta and Google!

The underlying assumption that Apple took is the following: if they offer a convenient way to get a new iPhone in your pocket for a low monthly payment and the opportunity to upgrade it when a new model comes out, they can expect that many consumers will be seduced by the simplicity and convenience.

What will Apple win?

• First of all, they will be less dependent on the launch of new blockbuster iPhones. The new business model would be about keeping subscriptions over time. An affordable price for the base subscription fee will be key for them to secure a large subscription base which they can then progressively trade-up to more expensive phones and subscription plans.
• They can monetize this large captive base through exclusive deals to subscribers, and get back a steady supply of iPhones to repurpose or refurbish, cutting out the middle man.
• They will also be able to pocket the monthly subscriptions fee for nothing whenever customers decide not to upgrade their phones as soon as they’re able to.
• And of course this model will also allow them to boost additional services by bundling its other subscription services with this hardware subscription: iCloud Storage, Apple Music, Apple TV and AppleCare, growing Apple’s subscriber numbers for each individual service.

Through this subscription service strategy Apple wants to increase its consumer lifetime value, the only disadvantage they will be facing are delayed cash flows. But cashing in later is not really a problem for Apple given the pile of unused cash in their balance sheet, current low interest rates and the limited options that Apple has to invest their cash.

What will consumers obtain?

• Buying an iPhone, iPad or Apple Watch will be as easy as subscribing to Apple Music. You just need to sign up online, without any need to engage a credit rating agency to evaluate your credit ranking to provide you the loan.
• Upgrading to a newer iPhone model will be easier and more cost-effective than ever and on top of that subscribers will be able to enjoy additional benefits. I could imagine exclusive colors or reserved first batches of new products for example. Fans would pre-order the new models by fear of missing out (FOMO) and upgrade their subscriptions.

This plan looks overall like a smart decision, in addition to all the other ones already taken by Tim Cook and his team. Apple will once again set new consumer trends. Playing first mover's advantage and changing again the market. Something to think of and get inspiration from!