Apple is about to change its business model
…and it’s going to affect the upgrade cycle, revenue, and Services
Of course the age of abundant information is prone to beg, borrow, and steal your attention. Reading blogs, news, and research has always been an inefficient user experience — finding needles in haystacks. But now, Annotote is the antidote, check it out: Don’t waste time or attention; get straight to the point.
I watched the Apple Special Event last week, and I certainly admired Lisa Jackson’s segment (1h21m mark):
While I celebrate Apple as a good steward — if not for almost everything else — I also notice that the new environmental goals announced by Lisa accentuate an inextricable tension in Apple’s business model, which now has to pivot in the coming years…
An inextricable tension
In the wake of that iPhone launch event, Horace Dediu summarized Lisa’s initiatives and offered the following upshot over at Asymco:
“…Apple now strives to design and build durable products that last as long as possible. That means long-lasting hardware coupled with long-lasting software... Because iPhones last longer, you can keep using them or pass them on to someone who will continue to use them after you upgrade.”
— Highlights courtesy of Annotote
He goes on to describe why that’s not a financial bugaboo for Apple, in sum:
“At this point in the presentation I wondered if everyone would rush out of the room and call their broker to sell Apple shares [since] value depends on frequency of upgrades. If products are not replaced frequently they do not generate revenues… This anxiety around replacement rates and extended lives is used by analysts to discount future cash flows and if those lifespans are extended price targets come down…
“It may be good for the environment but is it good for the bottom line? […] The important call to make is that Apple is making a bet that sustainability is a growth business. Fundamentally, Apple is betting on having customers not selling them products…
“An iPhone at $1200 may be less expensive than an iPhone at $600 if the $1200 version lasts twice as long as is used twice as much each day. The $1200 phone delivers 4x the utility at twice the price, making it half the price.”
— Highlights courtesy of Annotote
Color me skeptical on that hot-take. The more I read it, the more it sounds like a tortured rationalization — trying to make the financial case for going green. We can all make the ‘Apple is altruistic’ argument, but given the company’s status quo, its sustainability goals today are mutually exclusive of its ‘financial bottom line’. (And, for what it’s worth, I personally do not see the need for them to justify socially conscious means with financial ends, as seemingly everyone else does.)
Fitting this particular environmental initiative — to “ensure that Apple products last as long as possible” — into Apple’s current business model means revenue and margins will slip. Apple’s hardware revenue is generally derived from point-of-sale transactions, thus, in juxtaposition to its sustainability goals, Apple’s business model theoretically incentivizes it to compel consumers to buy more iPhones, more frequently. At the company-level, the associated opportunity costs of reducing that transaction cadence cannot be fully displaced by the goodwill accrued from corporate sustainability — although, by definition, it would be overrun by the positive externalities that accrue to society-at-large.
I’m not saying that Apple is naive. (While we should never assume that these people and their businesses are infallible, we also shouldn’t make a habit of developing hypotheses that depend on stupidity from first principles.) I just think Horace’s conclusion — that it’s a win-win — is wrong. Both he and popular consensus have missed the aforementioned paradox that inhibits Apple from reaching some nice, tidy alignment of social and financial incentives…
How to make sustainability a growth business
I was careful to specify Apple’s “status quo” and “current business model” above. If Apple can fully transition its business model to SaaS-like recurring revenue, then they should be able to pull this off with both social and financial responsibility aligned.
That isn’t as radical of an overhaul as it sounds. After all, right now, customers who don’t want to pay an upfront lump-sum for their iPhones at point-of-sale can opt for Apple’s iPhone Upgrade Program, which essentially amortizes the consumer cost of a phone over smaller monthly installment payments — usually 24 months in total — with heavy incentives to upgrade to a new phone every 12 months (thereby renewing the installment plan for another 2 years). Instead of an amortizing term loan, Apple now needs to transition payment plans toward recurring subscription fees. Of course, they would need to provide different pricing tiers for premium phones, then they’d be able to layer-on various services/accessories/perks/promotions as part of that subscription — like a bundle.
It goes without saying that subscriptions are not a silver bullet. There is no panacea. There are always tradeoffs, misincentives, etc. But, transitioning revenue to a subscription model would get Apple off of the product treadmill and into the sustainability game. That’s what it would take to truly “make sustainability a growth business” for them. It would also add a lever for their Services segment to pull, since it needs some dynamism and diversification away from the monolith of gaming revenue — not to mention a boost to Tim Cook’s all-consuming “Services narrative” with its promised launch of re-vamped products like Apple News and Apple TV (streaming) to complement preexisting programs like Apple Music, Apple Care, Apple Pay, etc. (Indeed, there is also that little issue of Apple’s rent-seeking in the App Store.) The net benefits of this transition to subscription are appreciable.
Another good steward
