The business of selling phones used to be a simple one. A manufacturer made a phone and a customer coughed up the asking price, took the phone home and the business was concluded. There was some kind of warranty but for the most part, it was like buying tomatoes at the market.
That’s pretty much how it’s still done in Zimbabwe. This way of selling phones is not optimal for manufacturers. This has become even worse as phones have gotten both good and expensive. Having to convince customers to shell out full price to replace a phone that still works has been getting harder.
In other countries, the instalment plan has been popular. The customer does not have to pay the full $1000 for an iPhone for example. The customer can pay for the phone in instalments, over 12, 24 or 36 months. This payment plan is usually done through a collaboration between the phone manufacturer and the network carrier. So, bundled in with the phone instalment is some forced airtime purchase.
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Example: in the US you can get the iPhone 13 for $800 cash outright. Or you could pay AT&T $22.23 per month for 3 years, which is still $800. A customer doesn’t even have to pay interest and it would not be prudent to pass up this offer. Paying full price would be for dummies. After your last payment, the phone is yours and you are free to do what you want with it.
Zimbabwean carriers tried this but Zimbos were apparently not keen on these payment plans. Econet led the way there and not even they still offer devices on credit or layby anymore.
Apple’s new way
Apple wants to take this instalment thing even further and are reported to be working on a hardware subscription service. The service is expected to launch later this year or early 2023. They want to sell the iPhone and other Apple devices as subscription services.
It would work like Netflix does. On Netflix you pay $9.99 a month and get to browse through their video catalogue but you don’t own any of the videos. If you fail to pay in a particular month, you are cut off.
Imagine that for a phone. You would lease an iPhone from Apple and pay your ‘rentals’ each month. The phone would never become yours, you’d merely be paying for the privilege of using it.
How would that work?
The pricing on this hardware subscription service is not yet out. Bloomberg says the monthly charge wouldn’t be the price of the device split across 12 or 24 months.
Pricing will make or break the new service. I would think it has to be less than the instalment price we saw above since the customer does not get to own the device after the lease period. Traditionally, after paying the $800 a customer owns the phone and if one is to pay and not get to own the device, the monthly charge would have to be lower.
iPhones retain value better than any other smartphones. A customer who paid off his $700 iPhone 11 in late 2021 can sell that phone for $550 right now in Zimbabwe. Apple themselves are selling that same model after refurbishment for $469.
So if that customer sells the phone for $550, they would have only paid $150 to use the phone for 3 years. That’s just over $4 a month. I would like to meet the dummy who wouldn’t pay $4 a month to use an iPhone, over spitting out $700 outright.
Apple’s charge probably won’t be that low. In the iPhone 11 example, for Apple, the phone lost $231 value in 3 years. So, just $6.41 per month would have covered the depreciation. Meaning if Apple had leased that phone out for $10 a month they would have made $129.24 from a phone they still own with the lessee having paid for depreciation too but before refurbishment costs.
The subscription model would introduce costs associated with repossessing phones when some customers default on their subscriptions. They can easily brick the phones via software so that the defaulters cannot use the devices. However, actually collecting the phones so they can be put up for new plans would have its cost in time and money even if debt collectors or repossession agents are engaged.
Why would Apple bother with this?
Although the new arrangement would make money for Apple, nothing beats getting the full cash price outright at launch. That’s because of the time value of money, a dollar today is worth more than a dollar in 3 years.
However, once off purchases are not ideal if one is to retain customers. A lease/instalment program creates a relationship whilst a once off purchase creates only a transaction. Those more committed customers will sink deeper into the ecosystem and will end up spending more on other Apple products and services. This is why investors value subscriptions now more than ever.
On the business side, companies with subscription revenue are getting higher price to earnings ratios on the stock exchanges. Therefore both investors and executives at Apple would benefit from increased subscription revenues.
The iPhone is by far the biggest revenue earner for Apple and if some of those sales are turned to subscriptions, that could see Apple stocks soar even higher than their already ridiculous levels.
It makes sense for them if you think about it. Right now Apple gets most of their revenue in the first few months after a new iPhone release. Subscription plans would spread the revenue evenly throughout the year, making it easier to plan.
I’m not all about the subscription model
I’ve found that I’m a typical Zimbabwean. I value ownership immensely and do not like credit. So, I would begrudgingly take on an instalment plan provided I got to own the product at the end. I say begrudgingly because the unpredictable nature of our economy makes me wimpish.
Nothing sucks more than interest rates going crazy when you’re left with 6 instalments on a 3 year plan then getting yourself relieved of the product. I’ve seen first hand what repossession looks like.
Hardware subscription makes sense in some cases. However, something about being at the mercy of the service providers does not sit right with me. You can whip out your calculator and show me how renting could be better than buying a house but I’d still want to own one.
The World Economic Forum (WEF) predicts such subscription services will be the norm and that makes my conspiracy senses tingle. Back in 2016, when discussing the “8 Predictions for the World in 2030” a Danish MP at the WEF uttered the now infamous words, “You’ll own nothing. And You’ll be happy.”
I think I can speak for Zimbabweans – we won’t be happy not owning anything.