Apple Upgrade: Highly Competitive Lease Program That’s Good For Both Apple and Consumers
Context
Apple just launched Apple Upgrade in the U.S., a leasing program with Klarna that effectively provides 0% financing leases for iPhones, Macs, Apple Watches, and iPads. It replaces the iPhone Upgrade Program in the U.S. It’s simpler, it makes sense for consumers, and, from an industry perspective, it’s highly competitive.
Why This Makes Sense for Consumers
With component prices driving up cost of phones and laptops, Apple's new leasing plan will make sense for some consumers. Many people are effectively leasing their phones already through carrier plans; leasing a watch or a Mac -- when you know that these are also devices that have upgrade cycles -- can make sense, too. Of course, it's still a lease, so you won't be able to use it until it dies unless you buy out the lease, and it may not be the absolute most economical approach.
Device pricing inside Apple Upgrade leases are the same as retail and there are no financing fees built into the monthly payment. Apple Upgrade offers 12- and 24-month terms for iPhone and Apple Watch, and 24- and 36-month options for Mac and iPad. Prices start as low as $17.99 per month for iPhone, $11.99 for Apple Watch, $24.99 for Mac, and $11.99 for iPad. These are for base models, but it appears that any model should be eligible, just with higher monthly payments. Trade-ins are allowed at the start of the lease to lower the monthly payments, and Apple slyly notes that if you make lease payments with an Apple Card you’ll get 3 percent Daily Cash back.
The terms of the lease are straightforward: “At the end of the lease term, customers can upgrade their device to the latest generation, purchase it with a one-time payment, or simply return it and exit the program.” iPhones are sold unlocked, but do require the buyer to activate it on a designated carrier (to prevent fraud or gray market resale).
Why This Makes Sense for Apple
Apple knows that its device prices are going up due to the macro RAMpocalypse environment, but it needs to maintain high hardware margins to fund its software and ecosystem business model. Apple also does not want to lower its margins permanently in response to a somewhat temporary component pricing crunch. Instead, it is willing to use a small percent of that margin to pay Klarna to manage a leasing program that is favorable to consumers that keeps people buying new devices on a steady cadence. Apple is also conscious of the resale value of its products both in dollar terms and ecosystem*; when these devices come off lease, Apple will have a new pool of devices to refurbish and resell.
Carrier and Competitor Implications
Carriers effectively already offer zero-interest financing and lease-like upgrade programs. Carriers are going to be of two minds on Apple Upgrade: CFOs will be thrilled to get some Apple device financing off their books. Strategy officers will be less enthused; device subsidy and financing programs effectively lock in subscribers to two-year (T-Mobile), three-year (AT&T), or even four-year (Verizon) terms at the carrier even though they stopped requiring service contracts years ago. (Customers can always pay off the devices in full and leave – and carriers sometimes offer switcher promotions to cover this cost – but that is not an attractive option for anyone.)
Unless Apple extends the program to authorized retailers, Apple Upgrade is a loss for retailers who sell iPads, Apple Watches, and Macs. I don’t expect that big box retailers like Target will see a big reduction in iPad sales over the holidays due to people buying direct from Apple with Apple Upgrade, but it’s something to watch. Retailers like B&H (and VARs) selling Macs into businesses are not affected by this program.
Computer OEMs already offer financing programs and some offer their own subscription (HP) or third party lease-to-own programs (Dell, Lenovo). These programs cost money, so the OEMs or the financing partners build in financing charges. The challenge will be to match Apple’s consumer-friendly terms within the lease program without Apple’s 38 - 40% hardware margins paying for it. Apple Upgrade is a strong response to today’s rising pricing environment and it may be something PC OEMs need to figure out how to match.
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*Anyone who claims Apple engages in planned obsolescence is simply wrong.