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A Low Cost Way For Apple To Help Sell iPhone 8s

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Barclay’s Apple analyst Mark Moskowitz believes that the company could offer one year of free subscriptions to Apple Music and 200GB of iCloud storage to offset the higher price of an iPhone 8. Apple Music costs $10 per month while 200GB of storage is $2.99 per month so one year for both of them is essentially worth $156.

Moskowitz’s survey work shows that iPhone buyer's intention increases from 18% to 36% when an iPhone price drops from $1,000 plus to $800. I’ve done some calculations on what the new high-end iPhone could be priced at and the entry level could easily be $999.

Apple iPhone SE

Source: Apple

Overall I’d agree with Moskowitz that this could be a smart move on Apple’s part not just to help defray the cost of the iPhone 8 but to also get more users to subscribe to Apple Music and iCloud storage. While the company will lose some revenue and take a hit to gross margins I would hope that current subscribers also get this offering and not just new ones (otherwise the company will really upset current users). The impact could be offset in the short-term by people buying higher priced iPhone 8’s and in the long-term by new subscribers to high margin services.

Big payoff if more iPhone 8’s are sold

Moskowitz estimates that an offering such as this could increase iPhone 8 sales from his 40 million units in calendar 2018 to 64 million. Assuming his projection of 224 million units stays the same while taking into account the cannibalization of other iPhone versions (which drives higher average selling prices or ASPs) and subsidizing Apple Music and storage revenue Moskowitz believes this could add $9.8 billion to the company’s revenue in calendar 2018.

Margins are much higher than the company’s average

Apple’s gross margin was 38.5% in the June quarter and management has said that its services gross margin is higher than this.

Moskowitz estimates that it costs Apple $43 and $7 per year to provide Apple Music and 200GB of storage, respectively. Once the free year is over and a user re-ups their membership the margins on Apple Music is 64% (profit of $77 on revenue of $120) and for storage it is 81% (profit of $29 on revenue of $36).

iPhone and company margins will be negatively impacted in the short-term by this type of offering. While the iPhone’s average selling price or ASP was $606 in the June quarter if the iPhone 8 is priced at $1,000 or more it won’t have as big as impact. And there is the potential that if enough buyers renew this will add to its higher margin revenue stream.