At the close of July, Apple unveiled a significant new initiative designed to make its flagship iPhones more accessible to consumers through a leasing program. This move, undertaken in partnership with the prominent "buy now, pay later" platform Klarna, allows US consumers to acquire an iPhone for a monthly fee starting at $17.99 (USD) over a two-year term. Upon completion of this period, users are presented with the option to return the device or upgrade to the latest model. The program emerges against a backdrop of escalating device prices, a trend largely attributed to the insatiable demand for memory chips fueling the artificial intelligence (AI) buildout. For Elliot Johnson, Chief Investment Officer at Evolve ETFs in Toronto, this development signifies more than just Apple’s approach to inflation and affordability; it is a clear indicator of how the tech giant is poised to drive future growth through its consumer-facing technologies, particularly in the burgeoning AI landscape.
While the broader tech industry has largely focused its growth narrative on enterprise adoption of AI, Johnson posits that Apple’s consumer-centric strategy offers a distinct, yet equally potent, path to expansion. The enterprise case for AI, which centers on cost reduction through headcount optimization, margin enhancement, and productivity boosts, is indeed straightforward and has been a dominant theme in recent market analysis. However, the business case for AI within the consumer sector, though more intricate, is where Johnson believes Apple is charting a course for sustained growth and innovation.
Apple’s Distinct AI Trajectory: Beyond the Hyperscale Race
"Apple is a very interesting company because they have been criticized for a few years for being behind on AI," Johnson observed. "They’ve not been in that [AI] arms race. They’re not a hyperscaler, they’re not an AI frontier model company. They have a very, very successful chip business with Apple Silicon that they only use in their products. And some of those, interestingly, are very well suited to AI – which is, there are now shortages of Macs, especially Macs with large amounts of RAM. People running local models have been using some of those. So they’ve got people using AI on their hardware," he explained.
This perspective highlights a critical divergence in Apple’s AI strategy. Unlike cloud-centric AI providers or developers of large-scale foundational models, Apple has leveraged its proprietary Apple Silicon to empower AI capabilities directly on its devices. The surge in demand for Macs equipped with substantial RAM, driven by individuals running local AI models, underscores the effectiveness of this on-device approach. Johnson further elaborated, "Apple is actually in an interesting position where they never changed their business. They continue to just be very, very focused on personal computing hardware. And now they’ve got an AI story because they’ve partnered with Google on it. And people are now saying, ‘hang on a second, what’s going to be the relevant consumer products and services people buy in the age of AI?’ And I think people are saying, well, ‘I’m still going to be owning an iPhone, I’m still going to be owning a Mac.’" This suggests a fundamental belief that despite the AI revolution, the enduring utility and desirability of Apple’s core consumer hardware will remain paramount.
The Advantage of On-Device AI and Consumer-Centric Innovation
The narrative surrounding Apple Silicon echoes the early trajectory of Nvidia’s rapid ascent in the AI domain. Just as Nvidia’s Graphics Processing Units (GPUs) initially found their niche in gaming graphics and later became instrumental in AI computation, Apple has meticulously crafted a high-quality, integrated hardware and software system through its biennial iPhone iteration cycle. This sustained focus on product development has conferred a distinct advantage in a crucial area of AI poised for significant consumer growth: on-device AI models.
Johnson elaborates on the practical implications of this strategy. "Rather than running models on the cloud and processing prompts in data centers, many of the daily tasks that consumers and ordinary people use AI for can be done by chips on a single device." This shift towards localized AI processing is becoming increasingly feasible as inference, the process that reduces the computational demands of AI, continues to improve. By prioritizing on-device AI, Apple is positioned to enhance the intelligence and functionality of its smart devices without necessitating fundamental changes to their form factor. The promise is for gadgets that retain their familiar design while offering vastly expanded capabilities.
The highly disruptive and widely anticipated nature of AI has led many investors and consumers to believe that every facet of technology is undergoing a radical transformation. While Johnson acknowledges the transformative power of AI, he also emphasizes that traditional technological dynamics will persist. This includes the enduring consumer need for personal devices and the specialized success of companies catering to both consumer and enterprise markets. He posits that the historical leadership roles of Apple in consumer technology and Microsoft in enterprise technology are likely to continue into the AI era, albeit with new dimensions and capabilities integrated within their respective ecosystems.
Device Leasing: A Strategic Move Towards Recurring Revenue
The introduction of Apple’s new leasing model, in collaboration with Klarna, addresses an immediate inflationary pressure impacting device affordability. However, Johnson highlights that this initiative is also emblematic of Apple’s broader strategic pivot towards generating more recurring revenue, a financial model increasingly favored by investors for its predictability and stability. He notes that much of Apple’s past success has been built on cultivating a base of affluent consumers, individuals who can more readily afford to upgrade their devices every few years.
Even for this demographic, the substantial upfront cost of premium devices, such as a $1,500 iPhone, can present a psychological barrier. The appeal of monthly payments can significantly lower this barrier to entry. Furthermore, the concept of leasing and regular upgrades aligns seamlessly with Apple’s extensive ecosystem of services, including iCloud. As on-device AI capabilities mature and become more integral to daily user experiences, the leasing program could encourage consumers to view their iPhones less as outright purchases and more akin to leased automobiles. This shift effectively transforms hardware into a service, thereby bolstering recurring revenue streams, enhancing predictability in forward earnings, and ultimately making Apple a more attractive proposition for investors.
Bridging the AI Consumer Story for Investors
As financial advisors navigate the complexities of explaining the consumer-facing AI narrative to their clients, Johnson advocates for leveraging tangible, human-level interactions with technology to illustrate broader macroeconomic forces. "Lean into people’s user experience," Johnson advises. "It’s the best way to explain why the enterprise wants it too. If you’re an advisor talking to a client and the client doesn’t understand why companies are paying so much on AI, you can show them how when they asked AI for a recipe and then it gave you a really good answer. You can explain that your team can ask it for a spreadsheet and it makes the spreadsheet and it takes 10 seconds when it used to take a day. They can see how it allows people and companies to perform better, and when it’s framed that way, investors tend to get it."
This approach emphasizes the practical, everyday benefits of AI, making the technology’s value proposition clear and relatable. By demonstrating how AI can enhance personal productivity and efficiency, advisors can effectively communicate its potential to drive similar, if not greater, gains within enterprise environments. This grounded perspective, rooted in user experience, serves as a powerful tool for demystifying AI’s impact and articulating its significance to both individual investors and the broader market. The leasing program, therefore, is not merely a financial maneuver; it is a strategic component of Apple’s long-term vision to integrate AI deeply into the consumer experience, thereby solidifying its market leadership and driving sustained growth in an increasingly AI-centric world. The ongoing evolution of AI, coupled with Apple’s established consumer loyalty and innovative hardware, positions the company for a unique and compelling chapter in the technological revolution.
