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Apple’s Virtuous Cycle of Mutual Benefit
Apple

Apple’s annual flagship event was another iteration of providing products with increasing value to consumers at largely consistent prices. This is what we refer to as a virtuous cycle of mutual benefit. A product provides increasing value to the consumer at the same or lower price point, while more value accrues to Apple as it continues to grow its monetizable device base. Companies that participate in this virtuous cycle are most likely to continue to gain market share and expand market cap.

Case study in the four Ps.

Apple is a master of marketing’s four Ps. As the iPhone lineup has grown, so too has the importance of separating product features and pricing across the line. During the event, as Apple walked through each model, it became clear they’ve designed an iPhone for everyone with mostly overlapping features, yet separate and distinct in appeal and price, each with its own value proposition. Tim Cook, for example, said the iPhone 13 Pro is “for those who want the most out of their iPhone.” Beyond product and pricing, however, place and promotion have been real drivers of scale and margin expansion in the iPhone business. The iPhone’s “place,” or providing customers convenient access to purchase iPhones, has shifted from stores to online.

The beauty of the fall event, annual upgrades

In lining up the four Ps for separate and distinct customers, iPhone has expanded its base while driving increased conversion to the iPhone Upgrade Program. Apple has made annual upgrades seamless. And herein lies the beauty of Apple’s seemingly boring annual upgrades: annual upgrades! Pulling customers into a faster upgrade cycle. Combine all this with Apple’s advertising (from the event itself to 30 second spots to product placement in Ted Lasso), and the company’s world class marketing capabilities are clear and obvious.

What is less obvious is the juggernaut they’ve created with these annual upgrades. Apple enjoys increasingly recurring spend on a growing share of consumers’ wallets with expanding optionality from related services and accessories. Also important, the upgrade 5G rising tide will continue in FY22. We estimate 400m iPhones are over 3 years old, a base that gives Apple a head start in meeting Street expectations for 260m iPhone unit sales over the next 12 months.

Room for innovation

On top of what Apple announced at its fall event, we still we see room for innovation. For example, Apple made no mention of a hardware subscription that could eventually eliminate the annual upgrade decision. We continue to believe Apple will eventually introduce a 360 bundle with Apple One for services, plus iPhone, Mac, iPad and/or Apple Watch hardware for a single monthly fee. Such a bundle would further tighten Apple’s death grip on the devices we use hundreds of times every day. Add on the potential for Apple to enter new markets including AR, MR, and auto, and we leave the event confident that despite a “boring” upgrade event, the company’s future will be exciting.

What was announced

  • New iPad priced at $329 with 64GB of storage. Priced the same as the previous version, with double the storage.
  • New iPad Mini at $499, up from $399. Lots to get excited about here for people that prefer the smaller size, along with a 5G option.
  • Apple Watch Series 7 with 20% bigger screen size and 33% faster charge time (45 mins) over Series 6, with the price unchanged at $399. Notably, Watch did not add rumored biomarkers. We’ll have to wait a year or two for blood pressure monitoring.
  • iPhone 13 Pro camera is cinema-level quality, with pricing unchanged from last year. Additionally, Apple introduced a 1TB storage option. While very few people will purchase the 1TB option, it carries about 85% gross margin that will offset some of the other rising component costs.
  • We did not see everything we were looking for, which sets up a few expected new product announcements in October, including a new MacBook Pro and AirPods.

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