Look who just discovered Apple’s subscription story

Three years after Tim Cook began selling Apple as a services business, Barron’s is starting to buy it.

From The Promising Business That Could Pull Apple Out of its Tailspin ($)

Shares of Apple are down 27% since hitting an all-time high in October.

Most of the pain has come since Nov. 1, when Apple said it would no longer be reporting unit sales for its iPhone, iPad, and Mac devices.

The announcement rattled investors, who have long focused on iPhone sales, often to the exclusion of everything else. A wave of Wall Street downgrades has hit Apple stock in recent weeks…

And yet no one is worried about a shrinking user base for iPhones. Consider that while sales of the devices were flat in Apple’s just-ended fiscal year, its services revenue—iCloud, iTunes, and Apple Music—jumped 24%, to $37.2 billion. Indeed, iPhone users may not be upgrading as frequently, but they’re spending more within the ecosystem than ever before. And that means they’re sticking around.

“If churning off the iPhone is becoming more difficult, then iPhone units may be less relevant,” Gill says.

 Investors, with Apple’s help, need to find a better way to value the installed base. Enter subscriptions.

My take: Old story, new attitude. Remember Business Insider’s take on Cook’s Q1 2016 earnings call?

Apple is trying to change its story, and it will not work

8 Comments

  1. Gregg Thurman said:

    And yet no one is worried about a shrinking user base for iPhones. Consider that while sales of the devices were flat in Apple’s just-ended fiscal year, its services revenue—iCloud, iTunes, and Apple Music—jumped 24%, to $37.2 billion. Indeed, iPhone users may not be upgrading as frequently, but they’re spending more within the ecosystem than ever before. And that means they’re sticking around.

    “If churning off the iPhone is becoming more difficult, then iPhone units may be less relevant,” Gill says.

    The secret is out, and it only took 3 years and 47 whacks to the head with a 2X4 to get the memo.

    2
    December 9, 2018
  2. Robert Paul Leitao said:

    It’s estimated a little over 25% or about 270 million devices out of an estimated installed base of just over 1 billion devices are in the hands of non-original owners.

    The quality of the handsets has created an elongated economic life for the devices. Although the iPhone’s ASP rose to $766 in FY2018 from $652 in FY2017, the percentage of revenue flowing to the gross margin line has been on decline for the past few years. In other words, Apple is pricing new iPhones for the cost of innovation. It’s not in Apple’s best interest to sell old technology at lower prices simply to shorten the replacement cycle.

    Apple’s push for innovation is delivering the best handsets possible that will remain in service, on average, for over three years from the time of original purchase by the original owner. The installed base is increasing at double-digit rates even as new iPhone unit sales have remained fairly static since FY2016 because the economic life of new iPhones has lengthened, not shortened.

    The A11-based and A12-based iPhones provide users with greater performance, longer battery life and enhanced functionality over previous models. These handsets include the iPhone 8 series handsets and the iPhone X series handsets. It’s an imperative for Apple to push innovation and move into the market as many of these handsets as possible. However, the realities of innovation require the company to price the handsets to cover the costs of innovation.

    More important than selling more new iPhone units is offering the most advanced handsets possible which are equipped to use more sophisticated and advanced apps and services. As these new and newer handsets continue in active use, the greater the opportunity for Services revenue growth.

    It’s innovation that’s pushing new iPhone prices higher and it’s innovation and product quality that keeps iPhones in service for years after original purchase and by hundreds of millions of non-original owners.

    The Street’s continuing obsession with new iPhone unit sales obscures the underlying value being created by an expanding global base of device owners. The larger the installed base of users the greater the demand for pre-owned iPhones and the greater the demand for pre-owned iPhones the greater the resale value of pre-owned iPhones. This provides economic support for sales of new iPhones at prices that cover the high costs of innovation and increases demand for services.

    2
    December 9, 2018
  3. Gregg Thurman said:

    I don’t know how WS arrives at a 26 month replacement cycle.

    Using Roberts’s numbers, of which I’m in agreement, 1 Billion installed with 74% by original buyers is 740 Million iPhone users that buy new. Divide that by the 4 year average NEW iPhones sold annually (about 220 Million units) and you get an average replacement cycle of about 40 months.

    This also means that previously owned iPhones only have (on average) about 20 months of economically useful months of life in them. Not the market you’d expect a great deal of Services purchases from.

    If the replacement cycle was, in fact, 26 months annual iPhones sold would be about 320 Million (based on 60 month economically useful life).

    It’s no wonder WS and the media get Apple so wrong. They can’t add, subtract, multiply or divide, instead rely on dubious “Supply chain” sources for their “insights”.

    I see Services purchases as subscriptions and “in app”, derived primarily from original purchasers.

    0
    December 9, 2018
    • Robert Paul Leitao said:

      Greg:

      The latest data I’ve seen suggests the iPhone replacement cycle in North America and Europe (Apple’s two largest markets) has elongated to 3 years. In China (Apple’s 3rd largest market), the replacement cycle has elongated to over 3.5 years and in the rest of the world the replacement cycle is now over 4 years.

      This ties back roughly to the company’s multi-year pace of new iPhones unit sales. While I don’t expect new iPhone sales in FY2019 to decline from FY2018 levels appreciably, the data does suggest a 4th consecutive year of new iPhone sales between 210 million and 220 million units.

      Since the release of the original iPhone 6 series handsets in September 2014, the useful life of iPhone handsets has been markedly extended. There is of course a practical limit to how long an iPhone will remain in service and even with an elongation of the useful life of the handsets, demand for new iPhones will remain constant.

      Again, new iPhone unit sales peaked in FY2015 at 231.218 million units. In my read of the data only, I can see a slight pick-up in new unit sales next year as ASPs stabilize and the elongation of the useful life of iPhones, on average, comes to an end.

      0
      December 9, 2018
  4. Gregg Thurman said:

    The latest data I’ve seen suggests the iPhone replacement cycle in North America and Europe (Apple’s two largest markets) has elongated to 3 years. In China (Apple’s 3rd largest market), the replacement cycle has elongated to over 3.5 years and in the rest of the world the replacement cycle is now over 4 years.

    I don’t those estimates. I was arguing with Barron’s statement of 26 months (2.17 months). Overall (worldwide) my example shows the replacement cycle, at 3.35 months, as much closer to current data.

    0
    December 9, 2018
    • Robert Paul Leitao said:

      Gregg:

      I understand. I don’t expect the average age of iPhones in use to extend much further. I believe engagement with the eco-system will rise as today’s handsets continue to work their way into the installed base. The popularity of pre-owned iPhones is supporting Apple’s current ASPs. Innovation is expensive and by virtue of increasing global demand for pre-owned iPhones, Apple can continue to deliver the best and most advanced handsets on the planet.

      0
      December 10, 2018

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