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This article was originally published on Fool.com. All figures are in US dollars unless otherwise stated.
Monthly cost of stubbornness Apple (NASDAQ:AAPL) the fan rises.
Apple recently announced price increases for Apple Music and Apple TV+, charging subscribers $1 to $2 more per month. Apple is also pushing these price increases into the Apple One bundle, which also includes Apple Arcade, Apple News+, iCloud and more.
What doesn’t go up in price? iPhone.
These price changes, or lack thereof, can tell investors a lot about how Apple is positioning itself for the future.
Apple is sacrificing device profits
The cost of everything has increased significantly over the past year due to inflation, and the iPhone is no different. Estimates suggest that the BOM for the iPhone 14 Pro Max was 20% higher than the 13 Pro Max.
The cost of all the components found inside that little glass rectangle was nearly 46% of Apple’s asking price this year. That’s the highest cost of materials relative to the price Apple has paid for any Max model.
Instead of passing the increased cost on to consumers, Apple decided to keep the price of all its iPhone models the same. With competitors’ prices rising and inflation running rampant, this means Apple has made its iPhones much more attractive in terms of price.
That’s a bold move for a company that generated 52% of its revenue from the iPhone over the past year. It’s not just the iPhone. Notably, Apple has also given Apple TV buyers a price cut on its new 4K Apple TV, which now starts at just $129.
And while the new iPads have a higher starting price, Apple is keeping the old model in the lineup at its current price. That’s a move the company has made with other hardware lines, including the Mac, to keep prices affordable.
A shift towards more profitable services
It was only a few years ago that Apple TV+ was seen as a smart way to encourage people to buy new iPhones. Apple launched the service with a generous 12-month trial for anyone who bought a new Apple device.
However, the recent price hike suggests that Apple is serious about making the streaming service profitable. It will enter into major licensing agreements with sports leagues and its prestigious original content will begin to gain traction with a wide audience. It is also considering adding advertising to the platform.
The margin profile of the overall services business is extremely attractive, even considering the significant losses it is likely to incur in newer endeavors such as Apple TV+. Apple’s gross margin from services over the past year was 71.7%. That’s nearly double its 36.3% gross margin per device.
Gross margin for the services business continues to grow and is likely to expand further as Apple pushes prices higher. All told, services accounted for nearly one-third of Apple’s total gross profit over the past year. And services are likely to make up an even bigger percentage as Apple tries to raise prices.
Keeping device prices as low as possible, even to the point of sacrificing margin on their biggest source of revenue, can help boost overall sales and expand the user base of Apple device owners. With a larger base to sell its services to, Apple can maximize its most profitable (and increasingly profitable) segment, services.
Recent pricing decisions offer clear evidence that Apple sees services as a major driver of future profits.
This article was originally published on Fool.com. All figures are in US dollars unless otherwise noted.
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