Apple’s latest price changes tell investors a lot about the company’s future

Apple’s latest price changes tell investors a lot about the company’s future

The monthly cost of being a die-hard Apple (AAPL -1.54%) the fan goes up.

Apple recently announced price increases for Apple Music and Apple TV+, charging subscribers $1 or $2 more per month. Apple is also pushing those price increases on the Apple One bundle, which also includes Apple Arcade, Apple News+, iCloud, and more.

What does not go up in price? The Iphone.

These price changes, or the lack of them, 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 up a lot over the last year due to inflation, and the iPhone is no different. Estimates indicate that the bill of materials of the iPhone 14 Pro Max was 20% higher than that of the 13 Pro Max. The cost of all the components inside that little glass rectangle totaled nearly 46% of Apple’s selling price this year. That’s the highest material cost relative to its price that Apple has paid for any Max model.

Rather than pass on the increased costs to consumers, Apple decided to keep the price of all its iPhone models the same. With competitors jacking up prices and inflation rampant, it means that 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. Notably, Apple also gave Apple TV device buyers a discount on the price of its new Apple TV 4K, which now starts at just $129.

And while the new iPads have a higher starting price, Apple is keeping the older 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.

The drive towards more profitable services

Just a few years ago, Apple TV+ was seen as a smart way to incentivize new iPhone purchases. Apple launched the service with a generous 12-month trial for anyone who has purchased a new Apple device.

But the recent price hike indicates that Apple is serious about making the streaming service a profitable endeavor. It is making major licensing deals with sports leagues and its high-end original content is beginning to gain traction with a wide audience. is also investigating adding advertising to the platform

The margin profile in the service business overall is extremely attractive, even considering the significant losses likely to be incurred on newer endeavors like Apple TV+. Apple’s services gross margin for the past year was 71.7%. That’s nearly double its gross device margin of 36.3%.

Gross margin for the services business continues to expand, and will likely expand further as Apple raises prices. In all, services accounted for nearly a third of Apple’s total gross profits last year. And services are likely to make up an even bigger percentage in the future, as Apple looks to raise prices.

So keeping device prices as low as possible, even to the point of sacrificing margin on your biggest source of revenue, can help drive overall sales and grow the user base of Apple device owners. . With a larger base to sell its services, Apple can maximize its most profitable (and increasingly profitable) segment, services.

Recent pricing decisions offer clear evidence that Apple sees services as the main profit driver going forward.

Adam Levy has positions at Apple. The Motley Fool has positions and recommends Apple. The Motley Fool recommends the following options: $120 long calls in March 2023 at Apple and $130 short calls in March 2023 at Apple. The Motley Fool has a disclosure policy.

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