The monthly cost of being a diehard Apple (AAPL -1.67%) fan is going up.
Apple recently announced price increases for Apple Music and Apple TV+, charging subscribers $1 or $2 more per month. Apple is pushing those price increases into the Apple One bundle as well, which also includes Apple Arcade, Apple News+, iCloud, and more.
What’s not going up in price? The 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 gone way up over the past year due to inflation, and the iPhone is no different. Estimates indicate the bill of material for the iPhone 14 Pro Max was 20% higher than that of the 13 Pro Max. The cost of all the components found inside that little glass rectangle totaled nearly 46% of Apple’s asking price this year. That’s the highest cost of material relative to its price Apple has paid for any Max model.
Instead of passing on the increased costs to consumers, Apple decided to keep the price of all its iPhone models the same. With competitors increasing prices and inflation running rampant, it means Apple 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, either. Apple notably also gave Apple TV device purchasers 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 lineups, including the Mac, in order to maintain affordable pricing.
The push toward more profitable services
It was just a few years ago that Apple TV+ was seen as a clever way to incentivize new iPhone purchases. Apple launched the service with a generous 12-month trial for anyone who bought a new Apple device.
But the recent price hike indicates Apple is serious about making the streaming service a profitable endeavor. It’s making major licensing deals with sports leagues and its prestige original content is starting to gain traction with a broad audience. It’s also looking into adding advertising to the platform.
The margin profile on the overall services business is extremely attractive, even considering the significant losses it’s likely incurring on newer efforts like Apple TV+. Apple’s services gross margin over the past year was 71.7%. That’s nearly twice as high as its 36.3% device gross margin.
Gross margin for the services business continues to expand, and it’ll likely expand further as Apple pushes prices higher. All told, services accounted for nearly one-third of total gross profit at Apple over the past year. And services will likely account for an even greater percentage going forward as Apple aims to increase pricing.
So, keeping device prices as low as possible, even to the point of sacrificing margin on its biggest revenue source, can help drive overall sales and grow the user base of Apple device owners. With a bigger base to sell its services to, Apple can maximize its most profitable (and still increasingly profitable) segment, services.
The recent pricing decisions offer clear evidence that Apple sees services as the core profit driver going forward.
Adam Levy has positions in Apple. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
