One of the big announcements at Apple's (NASDAQ:AAPL) September event was the introduction of a new services bundle called Apple One. The top tier of the bundle includes a new service, Apple Fitness+, which streams at-home workouts to your Apple device while gathering data from your Apple Watch.
Here's why Fitness+ may be the most important product Apple unveiled.
Increasing the ties between hardware and services
The integration of software services and hardware is nothing new to Apple. Peloton (NASDAQ:PTON) successfully adapted the model to the fitness industry with its connected exercise bikes and live streaming workouts.
Peloton unbundled its services from its expensive equipment in 2018, and it lowered the price for its digital-only service at the end of 2019. The reasoning is straightforward for Peloton. "We view Digital trial and Membership as an effective way to get millions of people to experience our content and workouts, creating a unique and differentiating lead generation engine," management wrote in its second-quarter letter to shareholders earlier this year.
Paying $12.99 per month for some fun workouts is easy. Forking over a few thousand dollars for an exercise bike requires a lot more trust and commitment.
Apple might not be producing expensive exercise equipment, but it does sell a lot of premium personal computing devices. Fitness+ is strongly tied to the Apple Watch (it's essential hardware), and it currently requires an iPhone, iPad, or Apple TV to stream workouts as well. The Apple Fitness+ app could be another on-ramp for hardware sales and produce stronger customer retention.
Apple already has a massive iPhone user base to sell Fitness+ to, and it could be the first service to drive hardware sales beyond the iPhone. And when subscribers are looking to buy home workout equipment, they may be inclined to purchase a bike or treadmill that licenses Apple GymKit software, to further improve the experience.
Making the services bundle more attractive
With the introduction of Apple One, Apple's now interconnecting its subscription services, allowing its most popular services -- like Apple Music and iCloud -- to support less popular services.
Apple Fitness+ is part of the $29.99 per month Apple One Premier plan, which also includes Apple Music, Apple TV+, Apple Arcade, Apple News+, 2 TB of iCloud storage, and the ability to share the services with five other family members. It can be a very good deal for Apple customers interested in Fitness+ (regularly $9.99 per month) and at least one other Apple service.
There are several aspects to the Premier plan that make it especially valuable for Apple.
First is the ability to get customers to switch from competing services to Apple's. If an Apple user already subscribes to Peloton's digital service or a competing music streaming service, they may be inclined to switch based on the value of the bundle.
Second, it's an opportunity to increase total subscription revenue and customer lifetime value. Apple can upsell customers on more services with just a slight increase in price. Furthermore, bundling will increase subscriber retention for services, as customers would have to give up a lot more than when they subscribed to services individually.
Third, the Premier plan includes family sharing. So there's an opportunity to make entire households more loyal to Apple's products and services.
Finally, more service subscriptions ought to increase loyalty to Apple's hardware. The inclusion of services that only work with Apple devices, like Apple Arcade and Apple Fitness+, essentially locks customers into the Apple hardware ecosystem long-term.
The potential for Fitness+
At-home workout subscriptions are certainly having a moment amid the coronavirus pandemic. Millions of people subscribe to services like Peloton or Daily Burn, and subscriptions are growing quickly. Peloton has seen its digital subscribers more than triple over the past year, and the workouts per subscriber doubled last quarter, reaching 24.7 workouts per month.
There's potential for Apple Fitness+ to reach several million subscribers in short order. That could make it an important factor in driving Apple's services revenue going forward, particularly as part of the Apple One bundle. The service will also play a role in boosting Apple's other products category, which includes the Apple Watch and Apple TV. A few million Fitness+ subscribers could have a much broader effect than just the subscription revenue it brings in directly, and that makes it a strong service for the FAANG stock.