Services, not devices, are the next tech battleground
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’