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Apple's Services Bundle Is All About This 1 Metric

By Adam Levy – Aug 14, 2020 at 11:40AM

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Apple is uniquely positioned to profit in the short and long term from bundling.

The idea of an Apple (AAPL -0.34%) services bundle has been around for about four years or so, but it might become a reality in just a couple months. The iPhone maker is readying a series of bundles for its various services, according to a report from Bloomberg

CEO Tim Cook has made services a major focus of the business as the average iPhone owner takes longer to upgrade their device. Apple's well on its way to reaching Cook's goal of doubling its services revenue from 2017 by the end 2020 after introducing several new services over the last couple years.

By offering bundles of those services to consumers, Apple has the potential to improve a key metric used by most subscription services companies: customer lifetime value.

Six iPhone 11 smartphones in different colors being splashed by water

Image source: Apple.

Increasing attach rates and retention

One of the simplest ways to increase customer lifetime value is improved retention and higher attach rates.

Apple has over 60 million Apple Music subscribers. But it only has about 10 million active accounts for Apple TV+ (still on free trials), and Apple Arcade's expected to reach 12 million subscribers by year-end.

Bundled pricing should raise attach rates for the services while increasing the stickiness of those customers since they don't want to lose their preferred pricing.

A bundle of Apple TV+ or Apple Arcade with Apple Music could expand the subscriber base for all three services. It would help Apple differentiate its music-streaming service from competitors like Spotify, which is growing faster than Apple Music and threatens its dominant position in podcasts. Meanwhile, it would introduce Apple TV+ and Apple Arcade to more customers.

Apple Arcade could be the most important Apple service to get consumers to adopt. While it might cannibalize some of Apple's App Store revenue, it should generate incremental revenue for most casual mobile gamers while increasing loyalty to the iPhone.

Ultimately, higher attach rates for Apple's services will lead to greater loyalty for iPhone owners and increased switching activity from competitors' devices. That's the real driver of customer lifetime value: longer customer lives.

Getting new services profitable faster

Apple is also planning a new virtual fitness class subscription service, Bloomberg reports, which would be included in higher-tier bundles. Bundling new services like this or News+, which hasn't yet attracted many subscribers, could get them to scale fast enough to cover costs. 

Additionally, a fitness service could possibly benefit from reduced content costs if it's bundled with an Apple Music subscription. The biggest driver of Peloton's (PTON 13.00%) cost of subscription revenue in 2019 was its growing music royalty expense. If Apple can negotiate the use of music in fitness classes as part of its Apple Music subscriptions, it would significantly reduce the number of subscribers needed to turn a profit.

A fitness service also ties in with Apple's focus on health with the Apple Watch. Increased attach rates for the fitness service could lead to greater Apple Watch sales. Again, the tech titan is great at tying its services and devices together to increase the lifetime value of a customer.

The Apple bundle can make more money now

Driving incremental subscribers for services like Apple TV+ and Apple Arcade should be a top priority for Apple. Instead of paying a variable cost per subscriber on those services, like it does with App Store subscriptions, Apple's costs are largely fixed based on its content budget. As such, the company can offer a discount for bundling those services and still produce incremental operating income.

That's somewhat unique for bundling economics. For example, the cable industry will offer customers video service bundled with home internet service. The companies basically break even on video service, but increase the retention rates for home internet service, thus increasing customer lifetime value. 

But Apple can make a profit now and profit later (through increased customer longevity) with its bundle.

Focusing on Apple's customer lifetime value, as driven by its services, is what will fuel the next stage of growth for the FAANG stock. Bundling services together to increase the longevity of the average device owner while potentially increasing operating profits in the short term is a powerful factor supporting Apple shares.

Adam Levy owns shares of Apple. The Motley Fool owns shares of and recommends Apple, Peloton Interactive, and Spotify Technology. The Motley Fool has a disclosure policy.

Stocks Mentioned

Apple Stock Quote
Apple
AAPL
$147.81 (-0.34%) $0.50
Peloton Interactive Stock Quote
Peloton Interactive
PTON
$13.30 (13.00%) $1.53

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