Fresh on the heels of another quarter of strong growth for Apple's (AAPL) wearables franchises as well as many of its services businesses, Tim Cook provided a strong hint that his company is exploring ways to offer subscriptions that pair services with hardware.
In response to a question during Apple's Wednesday earnings call from Bernstein analyst Toni Sacconaghi about whether Apple's hardware might one day "be offered as a bundled service," Cook noted many customers effectively view hardware that way because they're relying on upgrade plans and other monthly payment options. "My perspective is that will grow in the future to larger numbers. It will grow disproportionately," he added.
Notably, Cook also said that Apple is "cognizant that there are lots of users out there that want a recurring payment like that and the receipt of new products on some sort of standard kind of basis," and that the company is "committed to make that easier to do than perhaps it is today."
As evidence, Cook highlighted Apple's plans (disclosed on the call) to allow Apple Card owners to pay for new iPhones interest-free via 24 monthly installments. Apple has already been offering iPhone upgrade plans since 2015; they give users the option to pay for a new iPhone and AppleCare+ coverage interest-free over 24 months, and to upgrade to a new phone if they wish after 12 months worth of payments have been made. In addition, various mobile carriers have their own upgrade plans in place.
But as others have argued, Apple could potentially go farther than this -- creating bundles that provide not just iPhone upgrades and AppleCare+, but also content services and the ability to upgrade other devices at fixed intervals.
Certainly, the steadily-growing willingness of consumers to forego traditional goods ownership in favor of subscription offerings that can deliver a superior user experience (just as long as you remain subscribed) gives Apple an incentive to roll out such offerings. But so do some company-specific trends.
With the number of Apple subscription services having swelled in recent years -- the list now includes AppleCare+, Apple Music, iCloud storage, News+, Arcade and (after its launch on Friday) TV+ -- it makes a lot of sense for Apple to explore ways to bundle at least some of these offerings. Indeed, just three weeks ago, The Financial Times reported that Apple has held early-stage talks about offering a bundle that features Apple Music and TV+.
Meanwhile, the tremendous sales growth that the Apple Watch and AirPods are seeing arguably gives Apple an incentive to consider bundles that provide (in addition to services and iPhone upgrades) guaranteed upgrades for wearables over fixed amounts of time.
Given how much they rely on tight iPhone pairing to support or enable various functions, the Watch and AirPods are (for a large percentage of their user bases, anyway) de facto iPhone peripherals. As a result, with penetration rates for each product line rapidly growing among iPhone owners, including Watch and/or AirPods upgrades within some hardware and services bundles would make a lot of sense. And eventually, the same could hold for an augmented reality headset that relies on iPhone pairing, assuming that reports about Apple's plans to launch such a product are true.
Should such hardware and services bundles be rolled out and see strong uptake, they could provide the twin financial benefits of both increasing the long-term revenue that Apple gets from a portion of its installed base, and boosting customer loyalty.
And given the valuation premiums that Wall Street has been willing to give cloud software firms and various other companies whose businesses rely on highly predictable subscription revenue streams, a greater shift in Apple's sales mix from traditional hardware sales to subscription payments could also help its stock obtain higher multiples over time.