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Apple's CEO Hints at a Major Business Model Change

By Daniel B. Kline – Nov 3, 2019 at 3:45PM

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The company might do something that investors usually love.

iPhone generally represents at least half of Apple (AAPL -1.26%) revenue, and the smartphone has been struggling. Even with over a week of sales of Apple's newest iPhones in its most recent quarter, the important segment's revenue was down during the period.

CEO Tim Cook tried to frame that in a positive light during the company's fiscal fourth-quarter earnings call. "iPhone revenue in the September quarter was $33 billion," he said. "This 9% decline over last year is a significant improvement over the 15% decline we saw across the first three quarters."

Still, iPhone revenue was more than half of Apple's Q4 total of $64 billion. The company did post 17% growth in its non-iPhone businesses, with service revenue jumping by 18% and wearables growing by "well over 50%," Cook said during the company's earnings call. That's positive news, but it's overshadowed by the drop in iPhone revenue -- a drop Cook may have a plan to address.

A worker shows off iPhones in an Apple store.

Apple may be considering changing how it sells iPhones. Image source: Apple.

Is an iPhone subscription coming?

Apple has generally not been in the subscription business aside from its Apple Music service and newer services like Apple News+, Apple Arcade, and Apple TV+. That may change, with Cook not shooting down the idea of bundling an iPhone with other services in a response to a question from analyst Toni Sacconaghi during the Q4 call.

In terms of hardware as a service or as a bundle, if you will, there are customers today that essentially view the hardware like that because they are on upgrade plans and so forth. And so to some degree that exists today, my perspective is that we will grow in the future to larger numbers that will grow disproportionately. And one of the things we are doing is trying to make it simpler and simpler for people to get on these sort of monthly financing kind of things.

That's not entirely committing to directly offering an iPhone subscription that keeps consumers with the latest device in exchange for a monthly fee. Cook did, however, make it clear that he sees the demand, and that some steps are being taken.

We are cognizant that there are lots of users out there that want sort of a recurring payment like that and the receipt of new products on some sort of standard kind of basis and we are committed to make that easier to do than perhaps it is today.

It's not clear exactly how an iPhone subscription would work and what would be included. Cook did, however, acknowledge that consumers want a subscription plan (without using those exact words) and that Apple may address that.

This is good news for investors

Some consumers create a sort of virtual iPhone subscription by replacing their phones every year. That's unpredictable revenue for the company, because it's dependent on consumers deciding that the new model is worth it, since upgrading often requires a lump-sum payment for a portion of the new phone (with the rest being financed).

If Apple can offer a subscription bundle that evens out expenses for consumers while assuring them the latest phone (along with services such as Apple Music and Apple TV+), that should appeal to consumers. Many people already have a sort of never-ending iPhone payment because they upgrade at least every other year. A subscription won't change that, but it will lock in their expenses and eliminate the yearly "should I or shouldn't I" upgrade decision.

Investors generally like subscription revenue. It's predictable and makes discretionary spending recurring. Offering a subscription iPhone bundle, therefore, would lock in consumer loyalty and make Apple revenue more predictable. It will also have the secondary effect of driving revenue for other Apple services like Apple TV+ and Apple Music (albeit probably at reduced rates as part of the bundle).

Consumers want this type of subscription because it gives them budget certainty. Apple should want it for the same reason. Cook did not commit to this major business model change, but he certainly opened the door for it, and investors should be excited about the possibility.

Daniel B. Kline owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: short January 2020 $155 calls on Apple and long January 2020 $150 calls on Apple and recommends the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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