How A Subscription Bundle Helps Apple De-Risk Its Services Business

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Apple (NASDAQ:AAPL) reportedly intends to launch bundled subscriptions this Fall, combining its various services including Apple Music, News, Arcade, and TV+ into a package priced at a lower monthly fee compared to subscribing for individual services. [1] We believe the launch could help to boost Apple’s Services Revenue and ARPU while reducing Apple’s dependence on commission Revenue.

Our dashboard Breaking Down Apple’s Services Revenue estimates the revenue figures for AppStore, Apple Music, Apple TV+, iCloud, Third-party Subscriptions, Licensing, Apple Care, and Apple Pay.

Boosting Services ARPU, Reducing Churn

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Services represent Apple’s fastest-growing and most profitable business. Over the first nine months of FY’20, Services Revenue rose 16% and Gross Profits from services rose by close to 20% year-over-year to about $26 billion, compared to hardware-related profits which expanded by less than 4%. While the aggregate numbers are large, Apple still has a lot more room to expand Services Revenue on a per-user basis. For perspective, we estimate Apple’s Services ARPU at under $4 per month ($46 billion in 2019 service revenue and an estimated 1 billion unique users). By bundling services, Apple could get users to pay for additional services they may have not signed up for individually and at the same time reduce churn and better lock customers into its ecosystem.

Reducing Apple’s Dependence on Commissions

We estimate that just about 40% of Apple’s Services revenue comes from proprietary services such as Apple TV+, Apple Music, and iCloud, with the remaining $60% coming from commissions – essentially taking a cut of app sales, third-party subscriptions, and traffic acquisition payments from search engine providers such as Google. Although commissions are lucrative, Apple is facing increasing scrutiny on this front, given its market power. For instance, Apple was part of the Congressional antitrust hearing for tech companies conducted in late July and now Epic Games has sued Apple on antitrust grounds after it removed Epic’s popular Fortnite game from the AppStore. However, if Apple is able to increase revenues from proprietary services such as Apple TV+, Apple Music, and iCloud via bundles, it could reduce the dependence of the services business on commission revenue.

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Notes:
  1. Apple Readies Subscription Bundles to Boost Digital Service, Bloomberg, August 2020 []