Apple is bundling up for winter

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On September 15th, Apple announced Apple One and Apple Premier; two monthly subscription plans that bundle Apple’s premium services - Apple Music, Apple TV+, Apple Arcade, and iCloud storage, for either individuals or families. Premier adds on Apple News+ and Apple Fitness+. What is the strategy and motivation driving this announcement? 

While Apple’s primary business model remains selling premium hardware at high margins, the company has a longstanding goal of increasing its services revenue. The latest bundles are all about the latter. Let me explain:
  • They neither help Apple connect better with its customers nor reduce churn on Apple’s hardware (HW) products - not that Apple needs any help connecting with its customers or reducing churn. Apple is a darling for its customers and its churn is near zero.
  • More importantly, they don’t aim at expanding Apple’s HW market share. They don’t make an iPhone (or any Apple HW for that matter) any more accessible and do not help in any way move the needle when it comes to buying an Apple HW product vs a competitor’s. 
With the bundles, Apple is focused on pushing its music, streaming video, gaming on its current users and not targeting users that are outside its ecosystem (e.g. Android). 

Many will argue that the bundles are not compelling and perhaps underwhelming because they are not integrated with Apple’s HW, so they will not contribute to the company’s core business. That’s the best part, though. Here’s why:
  • They enable Apple to diversify its revenue stream without discounting its HW.
  • They are very honest to Apple’s philosophy: Tying the offerings to Apple’s HW would have been so alien to Apple. Apple is a luxury brand and it won’t discount its HW to attract users. 
Apple is unrelentingly moving forward with its drive towards higher services revenue as part of its overall earnings. It is on track to hit its set target of doubling its services revenues by the end of 2020 compared to 2016. These bundles will allow Apple to take its services revenues to the next level. Not attaching the offerings to HW indicates that: 
  • Apple strongly believes that its services can grab more money from its current user base.
  • There is plenty of upside potential. In the future, Apple can choose to attach its bundles to its HW to attract more users to the Apple ecosystem.
Many will say that the bundles are a sign that some of these individual subscriptions didn't draw enough consumer attention on their own. Even if that's true, it’s more of a reason to not attach the offerings to its HW. Apple knows that there are plenty of untapped dollars in its current user base and it is intent on monetizing it fully before it looks outside. I like this strategy. It’s simple and focused - true to Apple - and has plenty of upside potential.

Disclaimer: This post is merely my own assessment and is not an investment recommendation. For professional advice, seek input from a licensed investment advisor. 

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