Ser­vices, not de­vices, are the next tech bat­tle­ground

The Daily Telegraph - Business - - Business Comment - ROBIN PAGNAMENTA

From robot pets for lonely old folks to tele­vi­sions that roll up like car­pets, the an­nual CES show in Las Ve­gas was stuffed with the usual dizzy­ing as­sort­ment of giz­mos and hi-tech wiz­ardry.

But de­spite the tra­di­tional frenzy of hype sur­round­ing the event, as dazed and hun­gover del­e­gates pack up their bags and head for home to­day there is a lin­ger­ing sense that there was some­thing miss­ing at CES this year.

While there was no short­age of gad­gets on dis­play, the global tech­nol­ogy in­dus­try be­gins 2019 fac­ing a tough chal­lenge.

Las Ve­gas is famed for its high­stakes gam­bling.

But af­ter more than a decade of spec­tac­u­lar growth, smart­phone sales have flat­lined and the stock price of the world’s biggest tech com­pa­nies are in a swoon, prompt­ing many to won­der where in­dus­try gi­ants like Sam­sung and Ap­ple should place their next big bets. Smart home or con­nected de­vices? Aug­mented or vir­tual re­al­ity gog­gles? Or robot com­pan­ions?

It’s not clear and the ab­sence of an ob­vi­ous next killer prod­uct has left top ex­ec­u­tives scratch­ing their heads: how can they sus­tain sales and boost rev­enue in a less go-go era?

This week, Tim Cook sig­nalled Ap­ple’s pro­posed so­lu­tion to the prob­lem: a grow­ing fo­cus on ser­vices to com­pen­sate for slug­gish iPhone sales.

Ser­vices rev­enue – re­cur­ring pay­ments for iCloud and Ap­ple Mu­sic or the cut earned from sub­scrip­tions to third-party apps pur­chased via its App Store – hit an all-time high of $10bn (£7.8bn) in the fourth quar­ter of 2018 and made up 16pc of Ap­ple’s to­tal rev­enue, up from less than 10pc in the same pe­riod of 2015.

As con­sumers grow dis­il­lu­sioned with $1,000 phones, that money looks in­creas­ingly im­por­tant to the com­pany’s fu­ture.

This grow­ing drive for ser­vices rev­enue is set to be a key in­dus­try trend this year, as Ap­ple pur­sues a big push in mu­sic stream­ing and forks out bil­lions of dol­lars while rop­ing in stars like Oprah Win­frey to make its own TV shows ahead of the launch of a new video stream­ing ser­vice. It won’t be plain sail­ing, how­ever. That’s not just be­cause tech com­pa­nies that try to rein­vent them­selves as me­dia com­pa­nies of­ten strug­gle, but be­cause a grow­ing num­ber of other firms – large and small – are seek­ing to by­pass tra­di­tional app store gate­keep­ers like Ap­ple and Google by sell­ing their ser­vices di­rect to con­sumers.

Af­ter all, it’s be­com­ing in­creas­ingly easy for them to do so.

The iron grip these dom­i­nant play­ers once held over dis­tri­bu­tion via third-party apps on iPhone and An­droid, from which they took a juicy 30pc or 15pc cut of sub­scrip­tion rev­enue, is start­ing to fray.

Spo­tify, the Swedish mu­sic stream­ing busi­ness, was a pioneer when it ended in-app billing on the Google Play Store in 2014 and on iTunes in 2016.

Net­flix fol­lowed by an­nounc­ing that users would no longer be able to pay their monthly sub­scrip­tion ser­vice through iTunes.

Ea­ger to stop Ap­ple from eat­ing its lunch, Net­flix is in­stead en­cour­ag­ing its 118 mil­lion sub­scribers to its video stream­ing ser­vice to make pay­ments on its own web­site – a move that could po­ten­tially strip Ap­ple of hun­dreds of mil­lions of dol­lars of an­nual rev­enue.

Mean­while, Epic Games – the com­pany be­hind hit game Fort­nite

– is plan­ning to build its own dig­i­tal game app store as it looks to do some­thing sim­i­lar.

This grow­ing re­volt against in-app pay­ment sys­tems comes at a time when the en­tire space is about to get a whole lot more crowded with the im­mi­nent en­try of some big beasts from the es­tab­lished me­dia in­dus­try, ea­ger to stake their claim in an evolv­ing land­scape.

With Dis­ney plan­ning to launch its own video and film stream­ing ser­vice, Dis­ney +, later this year, the bat­tle­field looks threat­en­ing and in 2019 the strug­gle for dom­i­nance is set to in­ten­sify.

Which play­ers will emerge tri­umphant in a few years’ time?

To­day, it’s far from clear but they will need deep pock­ets to com­pete and the broader trend is clear.

As tech com­pa­nies seek to bol­ster their flag­ging in­come from de­vices with ser­vices, they are also fac­ing a back­lash from pow­er­ful con­tent com­pa­nies – both new and old – who are ex­ploit­ing their own heft and grow­ing stature to build di­rect re­la­tion­ships with cus­tomers and cut them out of the ac­tion.

For some, it could turn out to be a bru­tal fight for their very sur­vival.

‘A grow­ing num­ber of firms are seek­ing to by­pass app store gate­keep­ers by sell­ing ser­vices di­rect to con­sumers’

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