Apple’s transformation – From hardware to services
Apple has always been a hardware company, but that is slowly changing. The American company has made a lot of money over the past twelve years from the sale of iPhones and so far it has been its largest source of income. iPhone sales continued to grow for years as sales started in major countries such as India and China. With the smartphone market cooling down and Apple running out of new countries to release the iPhone, that’s no longer a way to grow sales.
It has long been a tradition among Apple watchers to look for a new hardware product that could generate new sales. The iPhone was the biggest success, but the iPod in 2001 and the iPad in 2010 also fulfilled that role. Since then, only smaller products have been added: AirPods and the Apple Watch, accessories for iPhones.
Shareholders and companies like to see growth, but where does it come from? Like many companies, Apple is looking at the holy grail of revenue in 2019: subscriptions. That’s been going on for a while, but now the time has come when Apple really seems to transform itself from a hardware company into a company that relies on selling hardware and providing services.
In this story, we look at the strategic steps Apple has taken so far to do that and how that could impact Apple’s future products, the values it conveys, and how you, as a user, use Apple’s software.
Apple’s streaming services
It is no secret that Apple has started to focus more on services. In 2016, the company declared a goal of doubling the revenue of its services division within four years and the company is well on its way to achieving that. When Apple discussed its quarterly results last time, the English word “services” came up about 70 times, more than Apple talked about iPhones or Macs.
The fact that the company focuses more on services was already apparent with the acquisition of Beats. Apple took over the company of rapper Dr. Dre five years ago for $3 billion, the largest acquisition in Apple history to date. Sure, Beats sells headphones, but Apple also took an interest in the streaming service, which has since been rebranded as Apple Music.
It probably won’t stop with a music streaming service. Director Tim Cook has hinted at a video streaming service several times. The electronics maker has been investing in its own series for a few years and has a deal with talk show host Oprah Winfrey, among others.
In addition to streaming entertainment, Apple has many other services that make money, such as Apple Pay for payments, paid iCloud storage for those who find the 5GB that Apple gives free is not enough, and of course the much longer existing AppleCare. In total, there are now 360 million people who pay for an Apple service, and Apple wants it to be half a billion within one and a half to two years.
With services in the areas of warranty, payments, web storage, music and video, a clear ecosystem of extra things you can buy when you buy your hardware is starting to emerge. For many people, payments to Apple don’t end with the purchase of a smartphone, and Apple is now starting to behave differently as a result of offering those services.
Other choices
The first app Apple released for Android made a lot of sense: a “Move to iOS” app to help iPhone buyers move things from an Android phone to an iPhone. It was typically an app from a company focused on its own walled garden, because this gate only went one way: from Android to iOS.
In November 2015, another app was added: Apple Music . In the battle for more users, the company decided to open its music streaming service to users of a competing mobile operating system. Now Apple had already made iTunes for Windows in 2003, but that was a completely different case; iTunes for Windows gave more people the ability to sync an iPod with their computer, so it was clearly designed to sell more hardware.
That reasoning does not apply to Apple Music for Android. Where services such as iCloud were first a way to make iOS more attractive, Apple now took a strategic step not to make iOS, but its own streaming service more attractive.
This step is not alone. The most important combination is perhaps the one with the Homepod speaker. By default, it can only play music via Apple Music and other services only work via AirPlay. Conversely, that is not the case; For example, Apple Music works on devices with Amazon Alexa. Spotify and Amazon’s music streaming service have no integration with the Homepod. From this you can deduce that Apple values the success of Apple Music more than that of the Homepod. After all: to use the Homepod, Apple Music is almost a requirement, but not vice versa. The sale of the service takes precedence over the sale of the hardware.
It doesn’t stop there. Apple has teamed up with Samsung to put an iTunes app on Samsung TVs and get AirPlay 2 to work on those same new TVs. These are the two companies that were still fighting legal patent battles in dozens of countries a few years ago. It didn’t stop at Samsung: AirPlay 2 will work on TVs from various manufacturers, including Sony. That means AirPlay 2 will work on Android TV, a release of Android.
Finally
Apple’s slow transformation from a hardware and software company to a service provider raises several questions. The main one is how it will affect the values of the company. In much of what the company has done over the years, privacy and security are important. That is still the case today; TV manufacturers aren’t allowed to track what users watch over AirPlay 2, which is a departure from what’s normal in today’s smart TV world.
A service provider may have other priorities. As Google, Amazon and Facebook have noticed, collecting user data is important to successfully develop services. That’s something Apple has already run into. Siri was several years ahead of the competition, but is now lagging behind, which could be partly due to the focus on privacy .
In addition, the competition is also taking steps in other areas. Netflix and Spotify customers can no longer take out subscriptions via the iOS app. That has to be done via the website, but both Apple companies are not allowed to say that in the app. That makes the user experience for new customers on iOS confusing and inferior to that of the websites and on Android.
That leads to another question: Apple has set up its own walled garden on iOS, but can that wall remain? Apple now withholds 30 percent of revenue from App Store purchases. Where alternative download stores exist, it can be seen that those rates are falling. Steam uses thirty percent in its game store, but the Epic Games Store, for example, uses twelve percent. That competition should not exist on iOS. Whether Apple can ban competition for the App Store is probably something that the US Supreme Court will consider .
As a result, during this transformation to providing services, several of Apple’s important values are under pressure: privacy and the shielding of iOS. Apple has managed to stick to that so far, but the question is whether it can stay that way. If you want to grow, you have to take the growing pains for granted. It’s up to Apple to show if it can reconcile the values of its time as a hardware and software company with its new identity as a service provider.