Apple and the Rundle

Apple and the Rundle

Morning folks, 

I awoke this morning to a flurry of anger and confusion. Just days after I called Peloton “the Apple of fitness”, it appears someone else is determined to own that lofty title… Apple. 

Last night, Apple announced a slew of new products and services. The notable new hardware offerings include the Apple Watch Series 6, which allows users to monitor their blood oxygen levels. They’re also releasing a cheaper version of the Apple Watch — the SE, using the same chip as the Series 5. Interestingly, Apple Card users will be able to pay for the SE from as little as $12 per month over 24 months. 

Apple also showcased two new iPads — the 8th generation iPad and a new iPad Air. However, there were no new iPhones. These are expected to be announced at a future event, possibly within the next month. 

Not being an Apple Watch or iPad user, what grabbed my attention was the new service announcements. 

By the end of the year, Apple will launch Fitness+ for $9.99 per month. Users will be able to access a catalog of video workouts, including yoga, dance, strength training, indoor cycling, and rowing. Users with an Apple Watch will be able to see their key metrics on the screen, helping them to stay within their desired heart-rate zone. 

This has, of course, been called a “Peloton killer” and Twitter has been awash with suggestions that Apple is going to crush their connected-fitness rival. I’ve spoken about this topic multiple times before, most notably in The Killer Signal Daily Insight this time last year.

Fitness+ is not, in my opinion, a serious competitor to Peloton. While there is some crossover with Peloton’s digital app, Fitness+ does not provide live classes. Essentially, they have rebranded the free workout videos one finds on YouTube (‘Yoga with Adriene’ has 8.31 million subscribers). There is very limited crossover between Fitness+ and Peloton’s $39 Connected Fitness subscription, which includes integration with in-home devices, live instruction, and a vast network of like-minded fitness enthusiasts. 

What does make Fitness+ interesting is its inclusion in Apple’s new recurring revenue bundle — what Scott Galloway calls “the rundle”. Apple One will launch a $9.99 per month option which includes Apple Music, Apple TV+, Apple Arcade, and 50gb of cloud storage. A family account will cost $14.99 per month, allowing five accounts on the same package, with 200gb of cloud storage. Finally, the premium subscription will include Fitness+ and Apple News+ for $30 per month. 

Let’s examine what this means for shareholders. Since September 2015, Apple’s revenue has increased by roughly 17%. However, Apple’s market capitalization has almost quadrupled over the same time period. How did that happen? 

Apple’s average price-to-earnings ratio back in 2015 (according to Morningstar) was 11. Today, it’s 35. 

How does a company, particularly a company the size of Apple, achieve such incredible multiple expansion? They do it by reframing the narrative. 

Let’s turn back to Scott Galloway for his take:

“The most accretive action taken by any $10 billion or larger business is to move from a transactional model to recurring revenue. This exploits one of the fundamental flaws of our species, the inability to register time. Time flies — it goes faster than our estimated consumption of a product during a given time period. Only 18% of gym members go to the gym consistently [...] The gangster factor in a trillion dollars in shareholder growth has been Apple increasing their recurring revenues from single digits to 23% of revenues.”

The Apple One play is to move Apple to a full recurring revenue services business. The financing of the SE watch (through the Apple Card) brings Apple closer to a business in which you don’t need a large cash outlay to participate. Like Amazon did with Prime, like Walmart is now doing with Walmart+, Apple will add incrementally to Apple One to convert as many iPhone, Watch, and iPad users to subscribers paying around $100 per year in highly predictable recurring revenue.

That’s the Apple of the future — Apple as a Service.