If rumors of hardware subscriptions are true, Apple could be on the verge of a broad business shift — moving from iPhone shipments to monetizing its installed base, according to one analyst. In a note to investors, Morgan Stanley chief analyst Katy Huberty noted that the rumored hardware subscription would allow users to own an iPhone with a monthly payment, “and that the investor narrative will shift from transactional sales to recurring sales.
Currently, Apple pays an average of $1 a day for hardware and services, Huberty said. However, she argues, ordinary users are also willing to pay more to use Apple devices and software.
As for the difference between hardware subscriptions and iPhone upgrade plans. A pure subscription service would do away with limited payment periods, meaning iPhone users would be able to “pay a monthly price in perpetuity to gain access to their device.”
To that end, Apple may debut multiple products at different pricing tiers. A lower-tier would allow users to get a traditional iPhone every 24 months, while a higher tier would give users access to newer devices and other perks.
“While Apple could eventually create a number of different bundles through subscription services, the introduction of pricing tiers — rather than a flat subscription rate — will allow Apple to base itself on each user’s preference for Apple products and services,” Huberty wrote. The consumption situation captures their maximum willingness to pay.”
As for the benefits of the subscription model, Huberty believes it could reduce hardware replacement cycles, increase the cost per user and spur the adoption of first-party Apple services. By ditching carriers or retailers, it could move more customers to a direct-to-consumer model.
The analyst also believes that Apple will offload repayment risk by continuing to work with third-party financial services. In the US, Apple has partnered with Goldman Sachs to launch the Apple Card or Citizen’s One.
Apple’s leading retention rate and its expanding ecosystem have created a platform, Huberty wrote. She noted that a shift from traditional transactional sales to recurring revenue would drive meaningful gains in Apple’s stock price, given the lifetime value of Apple’s subscribers.
The analyst maintained his 12-month Apple price target of $210. The price target is based on a 6x enterprise value-to-sales (EV/Sales) multiple for Apple’s products business and a 10.6x EV/Sales multiple for its services business, implying a target price-to-earnings ratio of 33.2x.