Apple shifts focus to consumer services

Falling hardware sales compels Apple to move towards a concerted fray into the online consumer service market.

Background

Apple Inc. is one of the most successful multinational technology companies in the world. It was founded by Steve Jobs, Steve Wozniak, and Ronald Wayne on April 1976 and was incorporated as Apple Computer, Inc. in January 1977. It currently designs, develops, and sells consumer electronics, computer software, and online services. Among the company’s most successful products are the iPhone smartphone, the iPad tablet computer, the Mac personal computer, the iPod portable media player, the Apple Watch smartwatch, the Apple TV digital media player, and the HomePod smart speaker. Apple's consumer software includes iTunes media player, the Safari web browser, as well as the iLife and iWork creativity and productivity suites. Its current online services include the iTunes Store, the iOS App Store and Mac App Store, Apple Music, and iCloud. The incumbent CEO of Apple is Tim Cook.

Apple has traditionally bundled its software services onto its hardware platform in a business model that pushed them to a US$1 trillion valuation. The introduction of the iPhone helped propel the smartphone industry to the ubiquitous sector it is now. However, over time, the sector has become increasingly saturated, with Apple’s largest cash-cow, the iPhone, facing stiff competition and falling sales. Increasing geopolitical trade tensions has affected portions of Apple operations. In addition, the company has faced numerous legal battles including over intellectual property. This is not to take away from increasing pressure over privacy and security firms that currently face the world’s top tech firms.

Analysis

Apple launched a streaming television service, a credit card, an online gaming service and a news subscription service in a move that shifts the traditionally hardware-focused company towards consumer services. The television and movie subscription service called Apple TV+ is geared towards showcasing original content. Apple Card is a credit card that is integrated with the companies indigenous wallet system, Apple Pay, claiming lower interest rates, a simplified applicant process, removal of fees, as well as higher levels of privacy and security. Apple Arcade boasts an ad-free online gaming service, that is playable offline as well, across its operating systems. Apple News+ introduces a subscription service that provides access to over 300 magazines. Revenue for Apple’s existing online consumer services grew 24% in 2018, although it only accounted for 14% of Apple’s revenue.

The recent move towards consumer services comes as Apple continues to promote its hardware as top-of-the-shelf merchandise. The stock-market responded by sending Apple shares down 1.2%. The biggest question mark pertaining to the reveal is how Apple TV+ will differentiate itself in an increasingly saturated streaming market. Failing to provide pricing details, analysts are still unclear as to how the service will compare to its competitors despite a slightly differing business model. However, Apple once again departs from its traditional policy of restricting its products to its own ecosystem, following Apple Music’s business model by offering the streaming service across other hardware platforms. The logic is clear: expand user base by allowing consumers, regardless of hardware, the choice to use Apple’s services.

In the introduction of their services, Apple executives repeatedly brought up privacy protections for consumers, especially in relation to Apple Card. Apple executives have perceived the threat to security presented by online consumer services and seek to reassure their customers of their security practices.

Apple’s push towards consumer services is well-warranted given the flood of hardware options that exist across various types of devices. While Apple will continue to innovate in the hardware sector, a capitalist, growth driven economic system demands that the company continuously increase its prospect of profit, especially for a publicly traded company. Intending to reduce the impact of the stock markets, Apple has recently embarked on a share buy-back scheme. However, the range of service sectors it has involved itself in are largely saturated markets. It may be worthwhile for Apple to begin to sell its greatest unique selling point, its operating system, across multiple hardware platforms. Such an endeavour may help in securing a larger consumer service base, while bringing in another source of revenue through greater meta-data procurement.

Assessment

Our assessment is that greater market saturation within the hardware sector has compelled Apple to focus more on its consumer services, in an attempt to maintain their growth forecast. We believe that given the lack of clarity surrounding Apple TV+’s services, it is difficult to estimate Apple’s online growth. We believe it may be a worthwhile endeavour for Apple to consider packaging its operating systems as a service across hardware platforms. 

Image Courtesy:  https://upload.wikimedia.org/wikipedia/commons/5/5a/Aerial_view_of_Apple_Park_dllu.jpg, Daniel L. Lu (user:dllu) [CC BY-SA 4.0 (https://creativecommons.org/licenses/by-sa/4.0)]