Transition of Apple into a Services Company has Just Started
In its previous earnings call earlier this year, Apple had put a lot of focus on its services. The company had for the first time stated its user base which was around 1 billion devices. Those one billion devices generated $5.5 billion in services revenue for Apple during the three months ending Dec. 26, an increase of 15% from the same period a year earlier.
The reason why Apple was putting services under the spotlight was because its traditional cash cow i.e the iPhone had witnessed marginal growth in Q1 2016 and had actually declined in Q2 this year. But apart from highlighting services, Apple has been taking steps to actually transform itself into a services company. Some of those steps we’ll discuss in this article.
1. iPhone Upgrade Program
Although a lot of people feel buying iPhone is a one time purchase, it’s actually a recurring activity in most countries where the iPhone is popular. In countries such as US, the iPhone was sold along with a contract which meant users paid a fixed fee every month to their carriers and got the opportunity to upgrade to a newer iPhone version every two years free of cost. If you didn’t upgrade to a newer iPhone after two years, the loss was yours as the carrier wouldn’t reduce your monthly fee.
So instead of putting down $600-$700 all at once when a new iPhone came out, people just paid $50-$60 every month to their carrier and got a new iPhone every two years along with whatever data, voice and messages the plan got them. However with all US carriers now shifting away to an Equipment Installment Plan, an iPhone truly becomes a one time purchase with the ability to only pay for the data packs separately once the device fee is paid off.
The shift to Equipment Installment Plan brings a problem to Apple as it truly makes the iPhone a one time purchase. To counter this problem, Apple brought the iPhone Upgrade Program last fall to make the iPhone a subscription just like the good old contract days. You have to pay a particular price every month depending upon the model you select and the storage. Apple allows you to upgrade to a newer iPhone model every year if you turn in your old iPhone and also adds free Apple Care protection to sweeten up the deal.
How successful Apple’s iPhone upgrade program has been, remains unknown, but at least Apple has made its attempt to try and convert owning an iPhone into a service rather than a one time purchase. It’s not difficult to see how Apple might apply the same for its other hardware products such as the MacBook and Apple Watch as well.
2. Apple Music
iTunes has definitely been one of the most popular services for digital music downloads. However just like everything else, even over here, it was a one time purchase – people would select which music tracks or albums they like and buy them, and Apple would get a cut in the process.
However with changing times, music streaming is now dominating all forms of music consumption. According to IFPI’s latest report, music streaming made 43% of digital music revenues and digital music revenues made 45% of the music industry’s revenue. This means that music streaming now contributes close to a quarter of the music industry’s revenue. With Apple Music, the company is trying to take a part of the music streaming pie. With around 13 million subscribers, Apple is now the second biggest music streaming platform subscribers wise, only behind Spotify, giving Apple a recurring revenue stream of tens of millions of dollars every month.
3. New App Store rules
App Store has always been a good source of revenue for Apple. However, till date, this has also been on a one time purchase basis for the most. People buy an app on app store or make an in-app purchase and Apple gets a 30% cut from it. With the newer rules, Apple would let developers keep 85% of the revenue after one year of managing to have a user subscribe to their app.
This is a boon for developers. Most developers currently don’t have effective methods of monetization except for charging a price for the app upfront, in app purchases or ads. For most developers, the only reason to continue maintaining an app is to make sure they are the best in their category of apps and when a new user buys an app, they end up paying for their app.
The previous model worked as long as iPhone sales kept increasing, as increased iPhone sales meant new users on the platform who would end up buying apps and would most probably select the app that’s most feature rich and has great UI and UX. However, with the sales of both iPhone and iPad declining, the number of new users on the iOS platform would also start to gradually decline which means no more new users to pay for an app. Until Apple is able to have a mass exodus of Android users jump ship to iPhone which doesn’t seem possible according to the latest Kantar report. In such a scenario, a subscription would be the best way for app developers to monetize their work.
Apart from subscriptions paving the way to a viable monetization method for developers, it would also help Apple. As I said with sales of iPhone and iPad gradually declining, the new users on the iOS platform would also decline which would also mean lesser people to pay for an app. In that scenario, Apple ends up getting lesser revenue as its cut from App Store sales is 30%. Subscriptions in such a scenario would ensure that Apple gets a constant and recurring stream of revenue from the App Store.
Considering the billion subscriber base that Apple has, 15% of even a $10/year subscription would end up being millions of dollars of recurring revenue for Apple every month.
4. Opening up of iMessage
The latest rumor before WWDC is that Apple is planning to open up iMessage to Android users. Apple has already made Apple Music available to Android users, and opening up of iMessage could very well be lucrative.
Currently, the places where Apple dominates, like America, Europe etc., people end up messaging each other on iMessage if both the parties are on iPhones, Else, its a normal SMS routed through the telecom carrier if the other party is on Android or some other platform. Opening up iMessage to Android which is pretty much the only alternate smartphone OS apart from iOS, would make iMessages ubiquitous all throughout. With a ubiquitous messaging platform comes the opportunity to build on top of it.
WeChat in China has already shown us the kind of value a chat app can create. WeChat currently commands a $7 ARPU, considering Apple’s popularity in America and Europe this ARPU can be even higher. How successful Apple can be at this remains to be seen. Facebook has already tried its hands at bots and has received lukewarm response till now. Apart from that an “all in one” app concept is less popular in the markets where Apple dominates except of course China where WeChat already dominates.
But if Apple is able to convert iMessage into a successful platform, the rewards could be enormous and could act as yet another constant revenue stream for Apple.
As time passes by, Apple is trying its best to convert itself from a hardware manufacturer and software maker to a services company. Apple has a solid one billion base which is highly profitable. However, what remains to be seen is whether Apple can be successful at services.
For one, the company’s culture isn’t made for services. While companies like Google and Facebook push out software and then constantly improve them, Apple nails down hardware and only then does it ships the software. Similarly, there are no induvidual product teams at Apple, there’s just VP of Hardware, VP of software etc. There’s no VP of iPhone or VP of iPad. But with declining iPhone and iPad sales, Apple needs to pivot into becoming a successful services company sooner rather than later.