Katy Huberty: Apple's days of $1-a-day may be numbered

"Could we be on the verge of a transition from shipments and ASPs to installed base monetization? We think so."

From a note to Morgan Stanley clients that landed on my desktop Monday:

Late last week Bloomberg reported that Apple is exploring launching a subscription offering for its hardware products as early as late 2022 or 2023, with all purchases tied to an Apple user’s Apple ID, rather than a phone number (in the case of an iPhone) or credit/debit card account. As we've long-argued, Apple's industry-leading retention rates and expanding ecosystem of hardware and services offerings have already created a "platform", and a pivot from selling hardware products in the traditional price x units model to monetizing Apple’s >1 billion user base through bundled monthly subscription offerings could drive meaningful upside to Apple's share price today given the growing lifetime value of an Apple user. While Apple has not commented on the article, and we don't expect a shift to this new model in the coming months, we share the following thoughts about the prospects of an Apple subscription model.

1. The average Apple user pays only $1 per day for their hardware and services. Their willingness to pay for the technology platform that controls their life is likely much higher. Based on Apple's latest installed base and revenue disclosures, the average Apple user spent just $280 on hardware, and contributed just $69 to Apple Services revenue, in CY21. In other words, Apple users spent slightly less than $1 per day on all Apple products and Services in 2021. Compare that with your average daily coffee, lunch or transportation bill, and it's easy to see how the ceiling on Apple daily spend per user is well ahead of current trends given 1) the importance of the Apple technology platform to user’s everyday lives, 2) high user engagement rates for Apple products and services, 3) industry leading loyalty rates, and 4) the optionality of integration with future product launches in adjacent markets like AR/VR, home, payments, health and autos. We are confident that the average Apple user’s willingness to pay for access to their Apple devices and services is meaningfully higher than $1/day or $30/month.

Maintains Overweight rating and $210 price target.

My take: Six more thoughts follow, but there's a limit to how far I can stretch fair use.

14 Comments

  1. John Konopka said:
    No doubt Apple has been looking at this for a long time. I imagine a menu of services you could sign up for including hardware, software, music, video, etc.

    At the high end you could get a new iPhone and iPad every year along with Apple TV+, etc. Lower down you might get a new device every two or three years. Lower down you might get refurbished devices. Talk about lock-in. Margrethe Vestager would have a conniption.

    7
    March 28, 2022
    • Dave Ryder said:
      @JK I agree on a range of options. I’d imagine that many people don’t realize just how much they are spending in an average year on Apple products and services.

      2
      March 28, 2022
    • Steven Philips said:
      They just need to allow more flexibility of options. Not like their current subscription plans.
      And the EU should have had Vestigial on a subscription plan and replaced her after 2 years!
      (Vestigial; “degenerate, rudimentary, or atrophied, having become functionless in the course of evolution.
      “the vestigial wings of kiwis are entirely hidden”)

      3
      March 28, 2022
  2. Horace Dediu said:
    Oh man, the memories, when I was modeling this 7 years ago. It’s always gratifying to see what was obvious 8 years ago become, um, obvious.

    18
    March 28, 2022
    • Dave Ryder said:
      @Horace, Do I remember correctly that you figured $1 per day for the cost of EACH Apple product or service?

      0
      March 28, 2022
    • Kirk DeBernardi said:
      Horace D.

      I remember the same and it was at that long-ago moment I realized you had one of the best fingers on the best pulse of Apple.

      Bravissimo.

      0
      March 29, 2022
  3. Miguel Ancira said:
    If that is true, and it looks more likely every day, then Katy’s price target should be substantially higher.

    Any thoughts?

    0
    March 28, 2022
    • Robert Paul Leitao said:
      Miguel: I’ll say “could” be higher. It may move to the “should” be higher when speculation migrates to transformative implementation. Of course, for investors with a long-term time horizon, it may be best to buy on the “could” be higher and find rewards when the “should” be higher is realized and Morgan Stanley makes to the move. I very much appreciate Katy’s interim notes. It provides insights into the thinking of a brilliant analyst and her team. Buying on “could” “should” bring some long-term rewards as Apple pivots to a new monetization model for its hardware lines.

      2
      March 28, 2022
  4. Daniel Epstein said:
    Seems to me Apple is big enough to both monetize its current user base and grow it with improvements in current devices and with new ones as well. Of course I am very already spending much more than the average user on a per day basis if the $1 a day figure is really the average. I think the synergies between Apple’s products is quite impressive and can be well worth what they cost on a daily basis. Anything that makes it easier for people to understand that is a big win for Apple. My cable/internet/phone bill for my home is already about 7.75 cents a day. I use my Apple products at home and in the office. Lots of room for growth. A billion users at 5 dollars a day would be 35 Billion dollars a week! Seems doable. And that is without a car.

    3
    March 28, 2022
  5. Jerry Doyle said:
    While I welcome seeing what Apple offers in a subscription basis relative to hardware and services established on monetizing its installed base of users, I also believe deeply that offering such service comes no where near getting the migration of users over to such subscription levels as many may be thinking. First, the offering has to be streamlined and simple. Too many selections become convoluted and intimidating to the consumer. Second, many consumers feel a loss of control going to a subscription service. They prefer ownership of their devices. We will see. I just want to throw that caveat out there because I truly do not believe that if Apple builds the offering consumers just perfunctorily migrate over to a complete subscription lifestyle.

    1
    March 28, 2022
    • Kirk DeBernardi said:
      Jerry D. —

      It does broaden the user base character of what Apple can potentially “hook you” to.

      Like a great plate of hors d’oeuvres — something for everyone

      I’ll take mine bacon-wrapped, thank you.

      0
      March 29, 2022

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