In January of this year I asked, “What Happened to Apple?” In spite of the rising price of its stock at the time, I argued that Apple was somehow “different” now and that the difference would eventually impact their ability to grow. I missed the temporary leap to the $1T market cap, but regardless of what happens to the stock (which today is uncertain), the substance of my concerns remain the same:
- Image: not everybody still loves Apple
- Cost: products cannot bankrupt customers
- Strategy: how many iPhones can Apple sell?
Let’s focus on products and services and the overall revenue strategy.
iPhones Still Drive the Revenue Bus – But Not for Long
There are lots of iPhones on the market today. Apple still pitches the most expensive phones, but there’s the obvious realization that Apple must broaden its iPhone user base, which is why there are so many iPhone varieties. But the Apple revenue pie-chart shows over 60% of its revenue comes from the iPhone. When the Apple pie-chart is compared to the Microsoft revenue pie-chart, the differences are striking, especially if we look at projected growth. Apple would like to increase iPhone market share in a shrinking market while Microsoft is increasing its Azure market share in a growing market. (By the way, there’s vulnerability at Alphabet and Facebook with their over-reliance on ad revenue to sustain their business models, and the likely regulation of social media that could easily disturb if not disrupt their entire business models.) Apple of course knows that its future will not be defined by iPhones. It knows all about the need for additional revenue streams.
New Revenue Streams from Within
Apple is famous for market disruption with new products and services. Here’s what I wrote in January:
“Once upon a time, Apple created whole new categories with unique products we didn’t even know we wanted – and then learned we couldn’t live without! The iPod and iPhone are the two best examples, though some would argue that iTunes makes the unique product category list as well. Even tablets were unique way back when. But the competition in smartphones, music and tablets is fierce. Arguably, Apple only holds one competitive advantage: the iPhone – which keeps getting more expensive and is more popular in the US than around the world. Differentiation is tougher for Apple (and everyone) to create and sustain. It’s also hard to follow versus lead: Apple’s iWatch is a not-so-fast-follower and the company is already late to the virtual reality (VR) and augmented realty (AR) markets.”
So now what?
Strategy #1 – New Products, Services & Applications – In – Not Outside of – Its Ecosystem
It’s often “rumored” that Apple is betting big on augmented and virtual reality (AR/VR), as well it should. While the ARKit is real, headsets are trickier, given how many are already on the market (and with adoption rates slower than anticipated). Smart glasses are even trickier. But it’s the kind of technology – where advanced architecture meets design elegance – where Apple could have competitive advantage. Apple rumor managers project that by 2020 it will assault the market with some of the most unique products and services the market has ever seen. We’ll see.
Apple is also betting on services revenue which has been growing significantly over the past few years. In fact, Apple’s new ecosystem is as much about services as it is about products, though it’s important not to separate the two, since they drive each other’s revenue streams. Which is why Apple needs new products as drivers of new services, and vice versa. What Apple does not want is for its customers to leave its ecosystem for alternative or, worse, superior, products or services. Apple Music versus, for example, Spotify. Apple AR/VR (eventually) versus, for example, Oculus, etc. And then there’s the App Store which is a cash cow if there ever was one, though Apple must keep looking over its shoulder regarding that 30% commission which, if reduced, would significantly cut into its profits.
What else? Streaming video services. (Is there room for another streamer with broad original content? Probably, but this initiative will require massive ongoing investments.) Self-driving vehicle software? Sure. New HomePod/speaker? Yes, but Apple’s way behind with an inferior product that needs improvement. Headphones? Always. Smaller, cooler (and cheaper) phones? Obviously. And, of course, new software. Apple will likely offer a mix of supporting products and services to keep as many customers inside the family as possible. New customers are also always the goal. Perhaps the most important new revenue streams will be derived from applications of its hardware and software, which is different for Apple. Healthcare is an example of how Apple can leverage its iWatch and iPhone to healthcare solutions, like monitoring and diagnoses.
Strategy #2 – Acquire & Fund
Good strategies are offensive and defensive. New products and services are offensive. Acquisitions and investments are defensive. Apple should buy Spotify. It should also acquire Netflix. Electronic Arts too. Apple should acquire companies that would integrate into its music/entertainment/end-user consumer devices ecosystem. Integration should be the driving acquisition strategy.
A super-defensive strategy would see Apple leaving its comfort zone – as Amazon has done so often over the years – and look seriously at (their partner) Accenture, eBay and SAIC, Inc. Apple as a conglomerate? Maybe. Maybe not. As I said, super-defensive.
Finally, as discussed earlier in the year, “Apple should also compete with the largest venture capital funds in the world by launching its own private equity team seeded with an immediate $5B investment. It should recruit some of the best venture capitalists in the world into a new Apple Investment Group (though should not use the acronym) … some of the companies in its venture portfolio could become M&A targets. It could also use its portfolio to stay current (and avoid playing catch-up),” which it had to do with smartwatches and AR/VR.
Execution is Key – How Far, How Fast, Against Who?
Apple’s overall strategy is clear: find new revenue streams to augment iPhone revenue and create/expand ancillary revenue streams for the Apple product/service suite. But what’s taking so long? Is 2020 the best they can do for AR/VR? What if Apple misses its projected release date, as has historically been the case with new releases of old and new products? What about the competition? Samsung (and the Android world) is a formidable rival with devices that are feature heavy compared to Apple’s iPhone and iPad, for example. Facebook (Oculus) and Microsoft (HoloLens) are already way ahead of Apple’s plans for AR/VR. Why should we believe Apple will win that race – or even come in second or third?
Apple’s also competing against its own image, fading as it may now be. Loyalists will tell you that today’s Apple is not the same Apple they knew five years ago. Despite comparisons to Microsoft under Steve Ballmer, Apple is more “adult” than it was, more driven by revenue and profitability in comfortable areas than it was. Asked another way, is Tim Cook more of an executioner than a dreamer? I’d argue that Apple under Cook’s leadership has instituted a discipline that’s foundational and potentially transformative – but not disruptive. Apple’s like a friend you partied with in college that when you saw them a decade later (on their way to a corporate partnership) they were, well, a little “different.” Still "fun," but a lot more serious.
Fast-Following Risks
All of that said, the clock is ticking. It’s not clear how well the slow-but-steady march to product/service excellence and service integration will serve the company and its shareholders. Apple still has lots of competitors, especially in the markets where Apple’s revenue is relatively small, such as laptops. Its proprietary platform strength is also a weakness, since cross-vendor integration remains challenging. Ultimately, the greatest threat to Apple is timing. Markets come and go, leaders emerge (and fail), new products become old – you get the idea. Apple has become a fast-follower, betting that its product excellence and differentiation will sustain itself through markets that are at least maturing, if not directionally settled. This is a shift from the old product creation strategy that gave the world iPods, iPads, iTunes and iPhones, among other products and services before the world knew it needed them. But it’s also a huge gamble. Apple’s business model – and brand – is predicated upon unique, highest-quality products and services. But without a steady stream of unique, high-quality products it will suffer. While R&D remains a huge priority for Apple, it also must yield major results. This is Apple’s ultimate Achilles Heel, and entering existing markets makes the threat much greater than when Apple (or anyone) creates whole new markets.
Perhaps the most significant change from the Jobs era is Apple’s role as fast-follower while betting the ranch that it can dominate existing markets with over-the-top products and services versus creating and leading new markets. In spite of how “well” this worked out in the smartwatch market, this is risky. By 2020, for example, what will the AR/VR market look like? Who will be the major players? Same for healthcare services, streaming content, digital assistants and self-driving vehicle software. If Apple’s willing to give up the lead, then it should hedge its strategy with acquisitions and venture investments, while continuing to develop second-to-market killer apps and phenomenal products, because no company can always win from behind.
