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.
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.