Apple Flexes Its Subscription Pricing Muscle

Apple Flexes Its Subscription Pricing Muscle

Apple increased its subscription pricing for Apple One, Music and TV+ by an average by 16%. This should add an additional 1%, or $1B, to net income over the next year. The key assumption in my estimate is that 95% of these subscriptions will be retained. In other words, churn will increase by 5% over the next year. Shares of AAPL moved higher on the news, finishing +1.5% for the day compared to the Nasdaq +0.9%.

The bottom line: Apple subscription prices are going up and most users won’t think twice about it given that Apple hardware locks in Apple subscription revenue.

The Math

Overall Services account for about 20% of Apple sales. Within Services, we believe Apple subscriptions (including Apple One, Music, TV+) account for about 20% of total revenue and that News+, Arcade and Fitness+ revenue accounts for 5% of total revenue.

We estimate the remaining 75% of Services revenue to be driven by:

  • App Store (40%)
  • Google Search (15%)
  • iTunes Store (10%)
  • Apple Pay (7%)
  • Apple Card (3%)

Applying a 16% price increase on 20% of Services revenue with a 95% retention rate equates to $1.7B in additional annual revenue. In FY23, I estimate overall revenue to be $420B (Street expectation at $410B) which implies the subscription bump will increase top line sales by 0.4% next year. The company implied that the updated pricing for Apple Music and TV+ are a result of an increase in licensing costs and a more extensive library. As a result, I believe the incremental revenue will have a 60% profit margin which adds $1B annually to the company’s bottom line.

Apple TV + gets the biggest bump

Prices for Apple One, Music, and iCloud increased on average by 12%. Prices on TV+ went up by an average of 39%. Averaging these two (Apple One, Music accounts for 85% of the total and TV+ 15% of the total) together yields 16% overall price increase.

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