Apple’s Services Playbook

It’s hard to have a conversation around Apple that does not include Apple’s services business. Rightly so, as the services revenue for Apple is likely to be one of the largest contributions to their overall company growth as well as one of the more predictable revenue streams. In Dec of last year, I wrote an article called Apple’s Services Challenge for our subscribers to our Think.tank industry analysis service. In that article, I point out how Apple’s services business is certainly an opportunity, but it will also be a new challenge for the company.

The challenge can be summed up as Apple being required to think beyond their own hardware for services support. In Apple’s Service Challenge I wrote the following:

A point about services I think is important to make is how a consumer will often separate the money they shell out for a service from the brand that offers it. To say it another way, services are neutral. The nature of subscribing to a service has historically assumed that service is widely available where the consumer wants it. The caveat being things like cable TV service (until late) or something like satellite radio, but neither of those models has ever yielded significant scale in the wider consumer market. Services that do scale take a more horizontal/modular approach and benefit from being as widely available on all shapes of hardware. This will be true of Apple’s first-party services as well. The consumer mindset is one of “If I subscribe to Apple Music, I feel I should not be limited to just Apple hardware to get the most out of my monthly subscription.” Or said another way, consumers will find subscribing to a service a harder sell if it is not more widely available. It is simply the new expectation in the digital age and wanting content anytime, anywhere.

Services growth will require a new playbook from Apple. One that incentivizes them to embrace the hardware, like Apple Music in the case of Sonos and Amazon Echo device. Hardware + platforms like the case of Samsung, LG, and Vizio TVs (more to come I’m sure). And platforms, like the case of Android, Windows, and any other platforms that may emerge and grow to take enough share for Apple to prioritize. Apple’s embracing of third-party hardware and, in some cases, competing hardware was entirely predictable, yet it seemed to catch many off guard. This is simply the services playbook, and Apple is now required to play by some new rules to grow their business.

Where Apple’s Playbook is Unique and Differentiated
Apple has accomplished many industry firsts. No other company in the history of consumer electronics has sold, at scale, a premium computing experience. Apple sells north of ~200 million iPhones every year, at an average ASP above $700 and Apple stands alone in this feat. Apple set financial records, App Store records, and the list goes on. But ultimately, what makes all these achievements possible is Apple’s monolithic vertical integration.

While it is true, some part of their services strategy will require them to break slightly from their vertical strategy, and it will not change the overarching strategic imperative to bundle hardware, software, and services together tightly. Apple has set the bar when it comes to hardware and software integration, and if they can bring services into this equation and things like Apple Music, a future TV/video service, Siri, and other new core experiences and out-integrate the third parties then it gives their hardware and software strategy even more strength in differentiation.

Looking back at a hindsight view of Apple, most of the focus on analyzing Apple as a hardware company. While I’ve always more strongly argued Apple is a software company the reality is they are equally a hardware and a software company. Now that the services business gets a great deal of attention, people like to wonder if Apple is, or should turn into, a services company. Such logic falls into the either/or fallacy that so often plagues Apple analysis. Ultimately, Apple is not a hardware company or a software company or a services company. Their future depends on them being hardware, software, and services company with each pillar deeply intertwined and integrated together.

In this equation, Apple’s first-party services a consumer subscribes to will be available on third-party hardware and competing platforms because it is unreasonable for Apple to assume every one of their customers will ONLY own their hardware. As I outlined, consumers will separate a service like Apple Music, or an Apple TV/video solution from Apple’s total hardware and if they pay $10,$20, or even $30 for an Apple content service they will expect that on any hardware they choose such as a smart speaker or TV. But that does not mean Apple does not care about a product like HomePod or Apple TV. What it means, in simple terms, is Apple will make those products the best endpoint to consume their first party services because those services will be more deeply integrated into Apple hardware and, therefore, will be the best of the Apple experience overall. This does not mean Apple’s services won’t work well on third-party hardware, just that Apple’s goal is to make their services the best on their hardware. Ultimately, this may end up being a catalyst to make Apple’s hardware and services even better.

Where this gets quite interesting is how Apple will be competing with companies they have not directly competed with before. In content, for example, they are now competing or will be competing with Amazon, Netflix, Disney, TV networks and even movie studios. While these companies and others which will enter the fold as new competition for Apple will excel is that they are first and foremost services companies and, for the moment, said services focused companies will do this better than Apple. Apple will do hardware better than most, if not all pure-play services companies, and they will likely meet in the middle in software. Each company brings a unique element to the equation but looking forward I find many fall into the temptation to emphasize the value of services and weight them more heavily than hardware. When the reality is, consumer electronics has always been a hardware-focused business and consumers are drawn to hardware objects of desire.

For Apple, and specifically, the management team and company culture are entering a period of testing as the historically unprecedented cash machine of iPhone begins to decline slightly and quickly stabilize as a revenue stream. Apple needs to find new growth engines, and while that can certainly come in the form of new hardware products, management needs to establish a clear playbook for the services business and challenge their people to bring the Apple process to new territory.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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