How Apple is about to kill innovation.
Past months have been tough for Apple. iPhone sales revenue declined 15% on Q1 2019, and the AAPL stock value fell down 20% since October 2018.
Hardware doesn’t seem to be Apple’s blockbuster product anymore.
The icing on the cake: Apple announced for the first time that the iPhone sales figures will no longer be public. It is a big deal as it is by far the firm’s most popular and most profitable product. Every year until now, new iPhones exploded the sales of the previous one, again and again.
It seems like Apple reached a cap in their business strategy, and must transition to a more flexible model.
Apple services (iTunes, iCloud, Apple Pay, Apple Music…) never really were the center of the company’s strategy (or at least in appearance). Their main purpose seems to be about making the Apple ecosystem richer : serving the hardware products to enhance user experience. But on the long run, they represent a key element to the firm’s expansion.
Revenue from services have been continually increasing. According to their 2018 annual Financial Report, it grew 23.5% yearly on average since 2016, representing today 14% of the total net sales.
The reason Apple users like their environment so much is no secret : the handy blue text bubbles, easy synchronization between all apple devices, a single account with dozens of service filling any possible personal or professional needs, almost without having to rely on any other companies.
Want to leave the ecosystem a bit and buy an Android ? You’ll then have to work with two accounts, your data won’t synchronize with your Apple devices, no more easy file sending, casting your display on your Apple TV… Everything will push you to come back to the ecosystem.
The more you drown yourself in, by feeding in more devices or services, the less you are able to leave it. The environnement is sticky.
As previously stated, that same ecosystem is strongly powered and enhanced by Apple Services.
According to a Forbes article, the number of visitors on subscription company websites has grown by 800% on average since 2014. We see more and more companies adapting their initial offer to a subscription based model.
Both the customer and the company are winners from the concept: the company can adapt its resource planning very effectively, predict revenue and costs with fewer factors and have an overall better business flexibility ; on the customer side, the simplicity and flexibility of the offer are the main value, as well as lower costs.
How did Amazon’s Prime Video service become popular ? Simply because it was already included in a subscription fee that many users already paid to get fast shipping. Users love ecosystems because it unifies the answer to their needs into one complete package (given it is an efficient one).
The more needs you cover in your offer, the more attractive it is for the consumer — especially if it all sits under one price.
As you might expect, Apple has some of its own cards to play in the subscription economy.
25th of April, 2019, Apple hosted a keynote entitled “It’s show time”. They announced a series of subscription services for late 2019: an all in one newspaper source, a full-fledged gaming platform, and of course a movie/show streaming service. All three services are accessible via a subscription (pricing remains unknown).
Through this announcement, we contemplate Apple’s renewal. It marks the transition phase of its strategy : from hardware to services. Apple is progressively becoming a service company.
The hardware, which used to be the central piece, is increasingly becoming a platform for the services.
Previous elements have already shown signs of how services are becoming Apple’s new cash cow:
Naturally, the creation of bundles bringing these new services together under a unique price seems to be an obvious strategy:
Picture the following offer (which is perfectly reasonable to imagine) :
In front of such a deal, a regular Apple user should have the following thoughts : “I am already paying that price for my Netflix and Spotify accounts. But here, I would have similar services PLUS a news subscription. And all of it is integrated in one price, one account, one ecosystem, it’s more practical.” On top of that, you could imagine bundles mixing in hardware and services, allowing even more normalized sales of Apple products.
And that’s the power of bundles. As long as the services are decent enough (something we can reasonably expect from Apple), the value of the package lies in the combination and not in the individual advantages.
This is key to the point of this article.
Today, almost one smartphone out of four is an iPhone, in other words it is integrated inside the Apple ecosystem. Despite controversies, Apple products and services spread like wildfire.
Recently, the very young Apple Music became the most subscribed music streaming service in the USA, only 4 years after its launch. And that’s how powerful the ecosystem is. The app is nothing really revolutionary or innovative, it is simply perfectly in sync with everything Apple.
Apple’s objective as a company is to make money to develop itself and give dividend to the shareholders. Don’t get me wrong, developing the brand ecosystem is a brilliant strategy, perfectly coherent to the philosophy that made them the first company to be worth a billion dollars. But here’s the problem…
Economic theory of Schumpeter and its extensions explain that competition is one of the most important sources of innovation. The more competitors in a market, the more there is an incentive for the actors to innovate, due to the “escape competition” motive.
Inversely, the more unleveled the competition, the less the incentive to innovate is large.
Back to our case, the competition for innovation in the market is completely disrupted by the fact that most services will sell according to the package they belong to, and no longer to their individual characteristics. In other words, the motivator to innovate is being taken over by the benefits of developing convenient ecosystems.
Independent/new players on these markets start with a huge disadvantage, limiting their potential customer-base to enthusiasts. No matter how innovative their technology is, they have no chance to compete with technology giants in such a market environnement.
The only chance of survival would be merger acquisition with a larger firm, possibly the only doorway to the belonging of a stable ecosystem.
But this is a hard and often failing process : according to an IJIAS study, more than 50% of M&As fail. Regardless of financial ressources, the acquired company often loses its nature, what made it valuable.
The technological services market is shifting. Consumers progressively no longer buy a service — they buy an ecosystem of services (and more), under the shape of a monthly subscription. The watchword is convenience.
The market shift is so important, that it has the potential to drive other markets with it. There is a growing understanding that hardware (which used to be the center of attention), is more of a platform on which users consume various services.
Today, tech companies gamble massively on service purchases. The Chinese manufacturer Xiaomi, for example, never makes more than 5% profit on each sold devices. As a result, Xiaomi devices sell like hotcakes (4th manufacturer in the world with an 8.5% market share(3Q18)), and they generate most of their benefit from the services sold on the hardware.
The danger of this shift towards ecosystems is the progressive loss of interest for the value of services (and probably even more soon), at the expense of smaller potentially innovative firms.
I focused my view on Apple as a follow-up to their new services announcement, and because of how prominent the ecosystem is in their strategy — but Google, Amazon or Microsoft all seem to go down the same road, with the aim of locking up consumers in the most sticky environnement possible.
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How Apple is about to kill innovation.
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