Apple is pushing the services category as a burgeoning part of its business with current and future growth potential. Focusing on and expanding services is a fascinating proposition as generally I’ve considered Apple as a company that sells hardware and bundles services for free. To me, these comments on the earnings call indicate Cook wants to develop services further in a serious way.
If Cook is being sincere, and not merely paying nice lip service in the middle of a hardware revenue slump, then it has huge implications on product direction. I’m wary that they might tread off the golden path, especially as internet services isn’t exactly something the company has shown to be comfortable with executing, but there are potential positive repercussions as well.
There’s a chance Apple dabbles in low-margin products as a result, for example. Selling customers high margin hardware and expecting associated high margin services purchases as well is far less compelling than a Kindle-esque strategy with cheaper hardware dependent upon ecosystem purchases. Arguably, Apple TV is destined to be exactly that. A cheap box with an assumed reliance on Apple subscription services.
On the negative side, I do think this means free iCloud storage will continue to be crippled for the foreseeable future with Apple encouraging people onto paid tiers. There’s a chance they bump the free quota slightly (currently 5 GB) but more likely is boost upsell opportunities for the paid plans. For example, I would not be surprised if Apple doubled the $0.99 per month tier to a 100 GB limit soon, up from 50 GB today. This is similar to how Apple pushed hardware ASP higher by keeping 16 GB model around and instead bumping the mid-tier to 64 GB.
Cook referred to Apple Music as Apple’s ‘first’ subscription service. You don’t need to be a seer to expect that more are coming. The prime candidate is something I dubiously dub ‘Apple Video’, the long-rumoured skinny bundle cable streaming service. Although Apple Video makes most sense in the context of Apple TV, it will certainly be available on every iOS device and Mac, maybe Android even. A video service can also be priced higher than music streaming, I would guess around the $30 price point, which is good news on the revenue growth front.
In the earnings call, it was noted that a big part of Services revenue growth is being driven by the App Store. This is entering dangerous territory for me, where Apple’s motivations are warped too far towards money rather than doing what is best for its developer community, in which I participate. Rumours of paid search are suddenly far more difficult to dismiss.
There are ways that Apple could boost revenue from the App Store that also simultaneously benefit developers and customers. If Apple can increase App Store monetisation for developers, it will see higher returns through the 30% cut. Specifically, Apple would need to increase income generation on monetisation platforms that it controls, like In-App Purchase or the initial upfront price of paid apps.
Avenues like ads can make developers rich but Apple gets nothing. It’s a leak of money that channels through their platform but they don’t get a slice of. Apple is backing out of the iAd business completely. Most of the richest developers on the App Store today make a large proportion of their income via advertising. Apple gets nothing.
If they could foster alternative monetisation strategies that go through their first-party payment systems and make developers switch away from advertising, Apple would be making money where they were previously making nothing. Successfully executing this would reduce the number of ads in apps whilst making Apple more money. That’s a win for customers, developers and Apple. Easy to say, way harder to actually find such monetisation avenues and do it.
Looking at the harsh realities, though, it is extremely difficult to see how any of this stuff adds meaningful revenue to Apple’s balance sheet. If the company wants to empower its future growth through its services businesses, it needs to offset billions of dollars of declining hardware revenue. Writing off billion dollar businesses as small sounds so flippant but for Apple it is true.
Apple Music has 13 million customers paying $10 a month right now. That’s $1.5 billion a year. Apple’s total yearly revenue for 2015 was approximately $230 billion. Apple Music is teensy-tiny on revenue terms. (No idea on profit, I’d guess it has around 30% margins). By the way, there is also a cannibalisation factor to account for here. People buying Apple Music will (logically) cut spending on iTunes downloads.
Perhaps, the way Apple drives non-negligible revenue growth is by a combination of many different things. For the last five years, Apple is the iPhone. In the future, maybe Apple is more of an ensemble affair with many different streams contributing to its overall numbers. There won’t be a single service that rivals its hardware income but a grouping of App Store income, Apple Music, (rumoured) Apple Video, iCloud tiers and whatever else could.
There’s nothing wrong with diversification per se but it is a change to how the company used to operate. Around the launch of iPad mini, there’s an obvious breakpoint in company strategy where they expanded from a couple of flagships to a myriad of variants in each category. The days of Apple’s products ‘all fitting on one table’ are long gone. If services do grow significantly, the metaphor really breaks down as its products would be intangibles.