Apple still come up with breakthrough innovations? In
September Apple introduced an iPhone with 3-D touch, Apple TV
that has been turned into a gaming device and a larger iPad
with a stylus that will take the tech giant into new niches.
These products looked awesome, but they were just improvements.
There was nothing groundbreaking about them. Apples
breakthrough innovation was financial its new iPhone
Upgrade Program, which is ingenious on many levels.
Lets briefly summarize that program. If you were to
buy an iPhone 6s with 16 gigabytes of memory outright online or
at an Apple store, it would cost you $649. The Apple Upgrade
Program will provide you free financing on this phone for two
years for $32.41 a month. However, the sum of these payments
will add up to $778, because it includes AppleCare+, which is
mandatory. AppleCare+ is a fancy name for an extended warranty
service that really adds three things: It extends your
technical support beyond 90 days to two years; it increases the
phone warranty from one year to two; and Apple will replace
your phone (for a small fee) if you drown it in the toilet or
drive over it the usual stuff we do to our beloved
iPhones from time to time.
But here is the kicker. In 12 months, when Apple comes out
with another iPhone (and believe me, they will), you will be
able to hand your now old (one year, that is) phone
back to Apple and get a brand-new one. That will automatically
extend your upgrade contract by 24 months, giving you the
option to get another iPhone in 12 months, and the cycle will
continue. This is a plan that would make even the financial
engineers at Goldman Sachs proud.
Heres why: The program turns Apple into an iPaaS
(iPhone as a Service) company. For $32.41 a month your
constitutional right to pursue happiness through ownership of
each new iPhone will finally be fulfilled. Consumers are
encouraged to upgrade their phone every year instead of every
two to three years, singlehandedly pushing up iPhone sales in
the U.S. much higher.
These higher sales will also come with much higher margins.
In the current
near-zero interest rate environment, financing will cost
Apple, lets say, around 4 percent, or $26 a year (on a
$650 phone). Incidentally, Apple raised the price of AppleCare+
by $30, from $99 to $129 a year. This should more than cover
the cost of financing for the first year, and if you keep
upgrading your phone, youll keep buying AppleCare+.
It gets better. When a customer buys an iPhone through Apple
Upgrade, AppleCare+s so-called attachment rate to that
iPhone sale is 100 percent. Apple will not sell you an iPhone
without AppleCare+. For iPhones sold by AT&T or even at an
Apple store, the AppleCare+ attachment rate is much lower
(Apple doesnt disclose the number). There is certainly
value in AppleCare+, but just as with any warranty, its margins
In 12 months Apple is going to have an inflow of year-old
iPhones. My guesstimate is that if you include interest and
warranty expenses, the cost of an iPhone traded in mid-contract
is somewhere around $260. What will Apple do with millions of
used iPhones? It will refurbish them and sell them in emerging
Russia and India. A steady inflow of used iPhones will help
Apple compete more effectively in emerging markets, which are
flooded with much cheaper smartphones. Refurbished iPhones are
gateway drugs to new, full-price iPhones. After all, once you
go Apple you dont go back (surveys show that Apple users
have 90 percent loyalty). Also, used products are often subject
to much lower import tariffs than new products, further
lowering the cost. So Apple will be able to sell your iPhone
Apple Upgrade takes control of the customer away from
wireless carriers. It dumbifies and commoditizes their
services. Wireless carriers used to be major subsidizers of
iPhones, but Apple Upgrade will change that. Carriers locked in
consumers to their services for the duration of the contract,
but not anymore. Now customers will be locked into Apple, and
every 12 months theyll get to make a decision as to which
carrier will be granted the privilege of carrying the bits and
bytes generated by their iPhones. Carriers that offer the
lowest price will win.
Apples upgrade program is a no-brainer for consumers
if and this is a very significant if they
perceive there is value in what Apple is asking them to pay
for: AppleCare+. Just as with the introduction of any new Apple
product, the chances of success for the iPhone Upgrade Program
are very high but not guaranteed. Still, at least for now the
question of whether Apple can still innovate has been answered.