Top companies around the world are pivoting themselves in the wake of transformational changes led by technology advancements. The tech companies are naturally at the forefront of it, mostly disrupting other legacy industries while sometimes challenging their own models to stay relevant.
Netflix pivoted itself from a niche DVD-by-mail service company to a streaming-led modern television network. Microsoft initially successfully positioned itself as a services company (clouds, ads, and music) from a products company (Windows, MS office). Microsoft is today a productivity and platform company for the mobile-first and cloud-first world, pivoting successfully from a mere ‘devices and services’ company.
Examples galore. Google started out as a search engine and today is trying its hand to become a commerce company. Amazon, on the other hand, having dominated the e-commerce space, now is eyeing advertising revenues as a major fillip while trying to become a search company.
The Apple turn
All this while, one of the most iconic companies out there has been inconspicuously placing its bets on a single product (iPhone) contributing as much as 65% to its revenue.
To be fair, after a disastrous proprietary Mac strategy, Apple has followed the paths of the likes of Microsoft and Google to create an ecosystem across its offerings and thereby create a customer lock-in via an app-augmented generation of iPhones.
What has, till date, been missing from the Apple strategy has been a marked shift to subscription as a model. This, however, seems to be up for change. In a recent earnings call, Tim Cook, Apple’s CEO, said, “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’re on upgrade plans and so forth. So to some degree that exists today.”
Apple has, since 2015, been allowing sales on a monthly payment basis with Apple Care warranty and up-to-date hardware as part of the deal. While marketing it as part of its environmental efforts, Apple has also been promoting its trade-in model thereby laying the groundwork for a subscription model for some time now. Further opportunities exist with the Goldman Sachs Apple Card, which offers free interest for 24 months on iPhone purchases. By spreading the cost of pricey iPhones across several months, Apple may indeed stretch its market access in price-sensitive emerging and growth markets.
Apple may finally have realised the power of the subscription model what with Salesforce, Netflix, Amazon, Spotify, and others embracing the age-old model as the predominant revenue model driver.
With the predictability of recurring revenue, investor pressure seems to be mounting on Apple to switch from a transaction-based model to a subscription-based one. The bundling for Apple has the potential to offer several benefits—hardware upgrades, iCloud storage, Apple Arcade, Apple Music, Apple Pay, Apple TV+ premium content, and of course the iPhone. With no dramatic increase in price or sales, Apple’s stock price could move north with such a move.
The subscription storm!
Across industries, smart companies have successfully reinvented themselves: GE with digital subscriptions such as data services, IBM offering IT and business subscription services, Tata Power’s recent ‘power-as-a-service’ foray, and Mahindra & Mahindra announcing its passenger vehicles on a subscription model. The trick lies in owning the consumers by aggregating and engaging them while monetising these relationships.
With services and wearables, which today account for 28%, alongside the iPhone and what have you all bundled in, Apple’s price-to-earnings multiple could begin to drift towards the likes of Google and Microsoft—from the 20 or so to 30. Valuations remain a direct function of the increase in earning and the quality of these earnings. Subscription earnings are higher quality earnings for they are stable, safer, often contractual, recurring, and ride out any market turbulence.
Going the subscription way is a smart move for it benefits with recurring, more solid, loyalty-driven revenue streams while allowing to skirt the smartphone commoditisation issue and leveraging evolution of Apple as a services and ecosystem brand.
Piyush Sharma, executive-in-residence at ISB and at UCLA, is a global CEO coach and a C-Suite and startup advisor; Rajendra Srivastava is the Dean of the Indian School of Business (ISB) and the Novartis Professor of marketing strategy and innovation.
Views are personal.