This week Apple unveiled many of the details of how it has strategised continuing growth now that all but the most optimistic recognise that the point of ‘peak iPhone’ has come and gone. That realisation has been reflected in the company’s share price. Having become the first company in history to reach a valuation of $1 trillion as July moved into August, Apple lost its position as the largest company in the world to first Amazon and now Microsoft.
As of the end of March 2019, Apple is worth just shy of $890 billion after a 2019 recovery from the broad tech sell-off of the latter part of last year. But to maintain upwards momentum over the near, medium and long term and escape the fate of gradual decline into ‘just another tech company’, like Nokia or even IBM before it, Apple needs to replace iPhone growth with another kind of growth. This week Tim Cook, the chief executive tasked with the unenviable task of succeeding Jobs, went a long way to explaining just how he plans to do that.
Apple Beyond the iPhone
Analysts and market observers have spent the past couple of years repeating that Apple needs to come up with a new killer product to replace the iPhone with sales inevitably peaking after a hugely successful 12 years since the launch of the first model back in 2007. The company and product synonymous with its late founder Steve Jobs has had a pretty good run on the iPhone, selling circ. 1.5 billion handsets by the end of 2018. It’s also by no means the end for the product even if continuing annual revenue growth now looks unrealistic.
Competitors from Samsung to Huawei have closed the gap and the iPhone no longer stands out as the ‘must have’ statement smartphone it once was. The price ceiling must also be close with the basic models of the XS starting at $1000 or £1000 in the UK. Models with bigger storage capacity have price tags just shy of $1500/£1500. Growing margins have kept iPhone revenues climbing over the past couple of years despite sales growth stalling. But there’s little room for manoeuvre now and new 2019 models aren’t expected to be more expensive again.
So Apple has to drive revenue growth from elsewhere. And it’s not going to be through a new ‘product’. Wearables like the Apple Watch have had some success but they don’t, and don’t look like having, the same kind of mass market as smartphones. The Google Glass smart spectacles were more or less a flop and AR/VR headsets or glasses might be big and Apple is invested in this area but it’s too early to tell how big and when.
iPhone revenue growth isn’t, in the immediately foreseeable future, going to be compensated by a new Apple product.
This week’s glitzy and star-studded event unveiled Apple sees its immediate prospects for growth lie elsewhere – in services.
Apple Is Now a Services Company And Content The Centrepiece
Cook has turned to content streaming as the sword by which he lives or dies as he plots Apple’s course through the post-peak iPhone waters ahead. It’s not exactly been a secret that the company has been planning some kind of challenge to Netflix and Amazon Prime’s hugely successful streaming services. It was known that Hollywood A-listers Oprah Winfrey, Steven Spielberg and JJ Abrams had been signed up to make content for Apple.
What wasn’t known is exactly what that content would be and the business model Apple planned to sell it through. In most ways that not really changed since this week’s presentation unveiling the service that will be called Apple TV Plus. We know some more details about some of the content that will be released when the service is rolled out in the autumn.
But we don’t know much about the kind of details that weren’t already known such as how much a subscription will cost, the full content library that will be available or plans for roll-out.
If all goes well, it will not the first time Apple have made a success of a content service. iTunes capitalised on the need for a digital business model for a music industry being brutalised by rampant piracy and failing to come up with one on their own. Others, most notably Spotify, followed and arguably improved that model but Apple did well out of iTunes. But then it was the pacesetter.
This time around Apple is playing catch-up with video content streaming. It has to break into a well-established duopoly featuring its fellow Faangs Netflix and Amazon with others such as Hulu already also at the table. And other big hitters such as the Disney and AT&T are also coming to market for a piece of the pie at roughly the same time as Apple. But Apple do have a major competitive advantage on its competitors – the iPhone. We’ll come back to how that ties into why the services strategy could be a big success. But what else is coming from Apple?
Google caused a stir last week with the announcement it plans to move into the gaming sector with a streaming service that would take games off of consoles and PCs and into the Cloud. Users would then be able to stream games such as Assassins Creed, that a beta test involved, that normally need powerful hardware. A screen, browser and high speed internet connection is all that would be required to play the most sophisticated games in the world.
Apple announced a similar plan this week – Apple Arcade. Very few details were provided but the idea seems to be basically the same as what Google’s Stadia will offer and seems like it will be a direct competitor.
Apple News Subscription
Another new service announced is a subscription version of the current free Apple News App, which sounds attractive. For $9.99 a month subscribers will have access to a library of around 300 big U.S. magazines and several newspapers including The Wall Street Journal and Los Angeles Times.
Apple Credit Card
The final major new product/service announced is an Apple credit card that will be provided in partnership with Goldman Sachs. It will work in conjunction with Apple Pay and be used as a digital card online with the physical card, a slick titanium design, only when paying in physical locations. USPs were announced as the card carrying zero fees and offering 2% cashback on purchases made via Apple Pay and 3% for any purchases of Apple tech or services.
No details on interest rates were provided.
Are The World, Analysts & Investors Impressed?
Apple’s event and the new products and services unveiled certainly generated interest and will have worried the companies across television and streaming, media, gaming and finance that Apple will now come into direct competition with. But how likely is it that the suit of launches unveiled will boost the company’s current $40 billion of annual services revenues (of $266 billion in total) enough to pick up the slack of the iPhone?
Opinions are mixed. But if Cook’s direction is to prove a roaring success, which it could well despite the tough competition in each of the new verticals announced, it will come down to the existing success of his predecessors crowning achievement – the iPhone.
Oprah Winfrey summed it up best when she said on Monday:
“They are in a billion pockets, y’all, a billion pockets.”
There are 900 million iPhones in active use around the world and that figure rises to 1.4 billion devices when devices including iPads and Apple laptops, desktops, TVs and Apple Watches are taken into the account. Just the number of iPhones in use represents around 6 times the total number of subscribers Netflix has attracted.
If Apple can leverage that shop window and existing ‘digital ecosystem’, by converting even a relatively modest ratio of the owners of Apple tech into subscribers of its new services, it will be in a very strong position.
Analysts at Goldman Sachs believe that Apple could convert 10% of the 85m monthly users of its free News app into paying subscribers. $9.99 a month x 8.5 million is $84.15 million of revenue a month or just over $1 billion a year. Even with 50% going to the media providing the content, half a billion a year with no major overheads is a decent starting place.
If Apple were to bundle subscriptions to Apple TV Plus, the Apple News app and Apple Arcade that could be a very attractive proposition to over a billion iPhone and other Apple tech owners.
A lot of questions remain unanswered. But the number of iPhone owners and the company’s reputation for treating its users’ privacy carefully, an edge not to be overlooked in the current big tech environment, mean that Cook might just stand a chance of cementing his legacy as a worthy successor to Jobs if he can pull it off. The biggest cloud on the horizon, however, might be if Apple is still in a billion pockets 5 or 10 years from now, y’all.