Apple announced their music and movie services will be available on non-Apple hardware. Whoa! This is huge. Ben Thompson correctly highlighted the importance, saying this shift in strategy (link $) “is not just fascinating, it’s frankly a bit stunning.” And “I think these announcements are a much bigger deal than people realize: Apple is absolutely sacrificing its traditional hardware business model, at least when it comes to TV black boxes and smart speakers, in favor of a content-centric services strategy.”
Why such a big deal? Apple’s incredible success was built on a consistent model: use proprietary software and services to make money selling hardware. That was true for the Apple II, Mac, iPod, iPhone, iPad, Watch. Despite near bankruptcy in 1997, the Apple business model remained sacrosanct. Side note: I’d argue iTunes for Windows with iPod was an exception that proved the rule.
Apple’s vertically integrated software/hardware stack allowed them to create premium experience. And premium profits. But also meant Apple services were hindered strategically. A strategy tax if you will. Because the optimal services strategy (think Google) is horizontal, putting your services on all platforms and devices. The marginal cost of extending an existing service to another platform is low, so in some sense services “want” to be everywhere. More users -> more data -> better services.
Suddenly Apple is putting Apple music on Amazon Alexa speakers. Apple movie and TV shows on Samsung, LG, Vizio and Sony TVs. And allowing AirPlay to those TVs, the ability to send content from your phone to your TV. Apple is destroying the proprietary value of their hardware. Most significantly Apple TV and HomePod, but also to a lessor extent the iPhone itself. What gives?
What’s happening now in 2019 is something I wrote about in 2013, in a post which I think holds up well.
But longer term, say 5, 10 or even 15 years, the Apple services strategy tax creates a third possible Apple bear story. Phones are becoming more and more about services. Let’s say the phone-services split was 90-10 for the first iPhone. It was primarily about what you held in your hand, not what’s in the cloud. Let’s say it’s now at 50-50. You can see where this is going. It’s possible that in a world where the phone-services split is 10-90 the other way, a company which focuses exclusively on services could wind up with a better overall premium phone experience than a company which focuses on complete systems. The strategy tax could actually dislodge Apple from the premium end of the market. Clearly this is a long term speculative scenario, but it’s a plausible future. Especially if you segment the market, where segments focused more on services will reach their tipping point earlier.
Apple makes money selling premium hardware, but what the people are paying for is premium experience. That’s the job to be done. And right now Google maps, Google email, Google voice assistant, etc are all better than Apple. Nonetheless, since I wrote that post in 2013, Apple has continued making enough moderate (if lagging) progress on its services, plus has innovated on its hardware (Face ID, camera, displays, integration of Mac and iPhone, custom ARM processors, integration of Apple Watch and Airpods) to keep their overall experience better. But this approach is showing cracks. Hence the new services strategy.
My guess is Apple’s new services strategy is, in select areas, to commoditize the complements. From Joel Spolsky’s classic post:
A complement is a product that you usually buy together with another product. Gas and cars are complements. Computer hardware is a classic complement of computer operating systems. And babysitters are a complement of dinner at fine restaurants. In a small town, when the local five star restaurant has a two-for-one Valentine’s day special, the local babysitters double their rates. (Actually, the nine-year-olds get roped into early service.) All else being equal, demand for a product increases when the prices of its complements decrease. Let me repeat that because you might have dozed off, and it’s important. Demand for a product increases when the prices of its complements decrease.
By putting music, movies, TV on all platforms, Apple has decided to stop making those services a premium differentiator for their hardware. They are commodities. Anyone can get them. Even customers who never buy Apple hardware. Hmmm….. what about the $3 billion Apple spent buying Beats in 2014? I’d say flushed down the toilet.
To be fair, there’s another possibility. Apple may be attempting to simultaneously create premium horizontal services with music/movies/TV, and retain their traditional premium vertical stack hardware business. Ben Thompson suggests this possibility when he says “In short, it seems that Apple can have its (services) cake and eat it too: offer exclusive content across all platforms, while preserving its integrated experience (and iMessage) for its moneymakers.”
Perhaps. But the strategy conflict remains. Making a cross platform service means avoiding proprietary customization. Exactly what made those services work better on Apple hardware. That said, I know enough about huge corporations to know how this will play inside Apple. The people in the music/movie/TV services group want it to be best in market. And that’s fine. Good for them! Perhaps they’ll succeed. But even if they become the best, they won’t differentiate Apple hardware. To the hardware teams at Apple, those services are now pure commodities, and the cheaper those commodities become, the more valuable their hardware complement.
The big open question here is which other services at Apple are candidates to go horizontal. If my commoditize the complement theory is correct, it should be all services which don’t move the bar on selling Apple hardware. Let’s try three buckets:
- Cross platform now: music, TV, movies, itunes
- Cross platform likely: books, all media content, parts of iCloud
- Cross platform unlikely: Siri, iMessage, maps, App store, Apple pay
At first I wanted to put Siri into bucket #2. The strategy trade off is acute for voice interface. Google and Amazon can partner with everyone, getting more users and data, making their voice interfaces better and better. Apple lags. But on the other hand, Apple is famously future product oriented. And I started thinking about which future product might benefit most from tight hardware/software integration. The (or at least one) answer is augmented reality (AR) glasses. So even though the pressure for Siri to go horizontal right now is large, I suspect it’ll remain proprietary. I moved Apply pay into bucket #3 for the same reason. Whenever Apple AR glasses arrive, buying stuff with Siri voice and Apple pay will be frictionless. And in tech, frictionless is money. Pure money.
Update January 15 (two days after original post): Apple just announced they are partnering with search provider DuckDuckGo on Apple maps. Maps is a critical strategic capability, so perhaps my guess on Apple’s new services strategy was wrong. That said, I stand by my fundamental point that to the extent a service is available everywhere, it becomes a complement to selling hardware, creating an economic incentive to keep the margin on those widely available services low. And to be clear, partnering with a particular search provider is very different from putting Apple maps on Android. Which remains extremely unlikely. In any case, a lot happening right now with Apple services strategically. Something to keep a close eye on for 2019.