Apple’s Services Strategy? A Little Bit of Everything (Premium)

Apple’s problem, of course, is that it’s a one-product company---the iPhone still represents about 62 percent of its overall revenues---and sales of that product are down and are expected to continue falling. This leaves Apple vulnerable, especially since it hasn’t been able to augment or replace the iPhone with another hit hardware product, as it had in the past when it transitioned from Mac to iPod to iPhone.

Indeed, Apple’s other hardware lines---which include Mac, iPad, Apple Watch, Apple TV, and peripherals---are each challenging in that they sell in far lower volume than iPhone and are refreshed even less frequently. Apple’s traditional model of selling new hardware to new and existing customers each year has started to wear thin at the edges.

Yes, Apple is correctly criticized for letting many of its non-iPhone devices wallow unchanged and non-upgraded for years. But most of what’s happening isn’t Apple’s fault. For example, smartphone sales were down across the entire industry last year, indicating a worldwide saturation with no obvious new locale on the horizon to bolster sales going forward. Device quality, too, is up across the industry, and consumers are holding on to their phones for longer than ever. These two factors have combined to undercut Apple’s decade-long strategy.

But Apple has already started changing. The company successfully raised the average selling price (ASP) of the iPhone in both 2017 and 2018---thanks to the new and more expensive iPhone X, XS, and XS Max models---helping to stem some of the revenue fall-offs from a decline in unit sales. That strategy, which I call Apple Jacked, is bad for consumers in that paying more for something that was already very expensive and has always been sold at obscenely-high margins is always bad.

But it also betrays the real genius of Tim Cook, a man who has no particular skill in product design but is perhaps unrivaled when it comes to numbers. Remember, Cook’s claim to fame is that he maximized Apple’s margins and revenues by relocating all of Apple’s manufacturing to the regulatory and low wages wonderland that is China. Figuring out which new iPhones to introduce at which higher new prices to maximize revenues was likely child’s play for him.

I should also acknowledge a flaw in my Apple Jacked complaint. Which is that raising the ASP of the iPhone (and Apple’s other products)---by about 20 percent overall, from what I can tell---can be somewhat justified by the reality that its customers are holding on to the devices for longer than ever before. If a $750 iPhone was expected to last 2-3 years back in, say, 2015, then perhaps spending $1000 on iPhone that lasts 3-4 years or more doesn’t represent a real-world price increase. Especially since virtually no one actually pays the full price of an iPhone up-front. Instead, that cost is spread out via monthly payments that are often further minimized by a trade-in. For which Apple, n...