SERVICES MAY MAKE MONEY, BUT THEY WON’T CREATE FANS
Nine years ago when I started writing about Apple, articles signaling “the beginning of the end for Apple” were already commonplace. To paraphrase Mark Twain, rumors of Apple's demise have been greatly exaggerated. In that time, Apple continued to grow at an astronomical pace, becoming one of the largest companies in the world. Yet this year, Apple has started to show some chinks in the armor. In January, Apple posted its first decline in revenue for the holiday season since 2001 (that was the year the original iPod was released). To make matters worse, the decrease in revenue was almost entirely accounted for by Apple's cash cow, the iPhone. iPhone sales have been flat for several years, but in the first quarter (Q1) of 2019, they declined 15 percent year over year. It is becoming clear that the iPhone alone cannot continue to fuel Apple's growth. The time has finally come to ask the question: What is Apple's post-iPhone strategy?
The March 25 event was unlike any Apple announcement I'd ever seen. There was no mention of hardware at all. Apple had uncharacteristically announced its new hardware, including new iPads and AirPods, via press releases the week before. Instead, we got Hollywood celebrities promoting new shows, a demo of magazine and gaming subscription services, and a preview of a new credit card. If you read between the lines, the message was clear: “Welcome to the new Apple.” Apple's new strategy is to build out an elaborate set of services and turn each iPhone customer into a recurring revenue stream.
In some ways Apple's pivot to services makes sense. Revenue from Apple's existing services (iTunes, App Store, Apple Music, etc.) has been a bright spot for Apple for years. While iPhone sales slumped in Q1, Apple's services grew by 19 percent year over year. In addition, Apple is following a well-traveled path for tech companies. Amazon long ago used its Prime membership to turn its e-commerce business into a subscription business; Google now offers so many services that it had to rebrand as Alphabet. In fact, Apple is the only Fortune 50 company that predominantly makes its money selling consumer electronics. In its Q1 earnings call, Tim Cook announced that Apple now has over 1.4 billion active devices worldwide. That's a mind-blowing reach that Apple has barely scratched the service of monetizing.
Apple had two unique value propositions for its new services. The first, Apple has leveraged for years—the convenience of an integrated ecosystem. Your iPhone already has Apple Pay built in, why not add an Apple credit card to that? Your Apple TV already has a TV app, what if we added some extra shows for you? The second unique value proposition that Apple staked out was privacy. This is the lynchpin to its services strategy. Apple's main competitor Google gives away most of its services for free. Even Android itself is free for phone makers to use. Google does all of this in order to leverage its customers' data to more effectively advertise to them. In essence,
people who use Google's services (including Android) are exchanging their privacy for Google's services. Since Apple is not in the ad business, it is in the unique position to offer privacy to its customers in a way that very few tech companies can. Its pitch is, essentially, “Sure, you'll have to pay for our services, but you'll never have to sacrifice your privacy.”
It's noteworthy that Apple's streak of consecutive growth started with the release of the iPod. From its inception, the story of Apple's success has been tied to its ability to release products that disrupt industries. In the early days, Apple made a name for itself with the Apple II and the Mac as one of the first companies to release personal computers. The growth streak that started with the iPod continued because of the release of the iPhone and the iPad. Apple's legacy of innovative products is what's not only made it one of the largest companies in the world, but according to Forbes, the most valuable brand in the world. Apple has managed to build a loyal following of customers that are willing to pay a premium for its products in a way that no other company has ever done.
As an analyst, I understand why Apple is diversifying its revenue streams. Increasing the lifetime value of your customers is a goal that every company in the world aspires to. But as a customer, I can't help but wonder if Apple is selling its soul in the process. Apple's pivot into services feels like a concession that it is no longer willing to bet on its ability to release the next great product that changes the world. Is Apple's next big thing to find new ways to ask its customers for more money?
Services have long been an important part of Apple's playbook. The iPod was largely successful thanks the iTunes Store. The iPhone was successful with the help of the App Store and iCloud. One announcement focused on services does not mean that Apple can no longer innovate, and it would be foolish to fall into the trap of pronouncing the death of Apple. But in the past, Apple's services have fit into the larger goal of creating the world's greatest hardware. This time, the services were the goal as opposed to a means to an end. Don't get me wrong, the services Apple announced will be useful to a lot of people. But none of them were truly innovative. As I watched Apple announce Apple TV Plus, I kept having the thought, “Does the world need another streaming service?” We already have Netflix, Amazon, HBO, and Hulu, to name a few. Services and product innovation don't have to be mutually exclusive. It's possible that Apple is right now secretly developing a revolutionary product that will change the world. But if services truly are the end game for Apple, I think it may be earning revenue while losing fans.