The iPhone and Apple's Services Strategy

https://stratechery.com/2019/the-iphone-and-apples-services-strategy/

by kaboro • 7 years ago

136 47 7 years ago

localhost2• 7 years ago

I really like how Ben framed Apple's announcements through the lens of a services strategy, i.e., it's not about the hardware anymore. Instead he presents a solid argument for how keeping lower-priced cost-optimized SKUs around increases the addressable market for Apple Services. Aggressive promotion of Apple TV+ as a way to drive new subscribers to other services (an aggregation theory play) is going to be a fun thing to watch over the next few years.

The only quibble I have with this piece is where Ben got the information about the Apple Arcade games being a fixed cost: "the company is paying a fixed amount for those games overall".

scarface743• 7 years ago

I don’t see any reason they wouldn’t be paying a fixed cost. It would allow Apple to offer Arcade at a low cost and high marginal profit and it would mean that game developers don’t have the risk of it not succeeding.

Netflix also license it’s non original and original content for a fixed priced

simonh4• 7 years ago

Apple don't pay a fixed cost to the game studio, see other comments. Netflix don't buy at a fixed price either, the production company gets recurring fees based on views.

1123581321• 7 years ago

Here’s an article saying something similar about how Apple is financing the games. It doesn’t list its sources, though. https://9to5mac.com/2019/04/14/arcade-500-million/

localhost2• 7 years ago

Thanks, but there's this quote in the article that you linked:

"it is believed that game developers will receive ongoing revenue based on how much time users spend playing their games"

So it looks like they're paying advances (significant - $1-$3M) against some kind of royalty agreement based on time spent playing their game. So not a fixed cost (but perhaps not everyone gets the advances against royalties deal?)

Edit: I just looked over at the Stratechery forums and it seems like others are questioning this as well

"For it to truly be a fixed cost, the participating game developers must be commoditized. Otherwise, they will demand increased payments as Apple’s revenues go up.

That may well be the case for games, but I think it’s worth noting because Ben has repeatedly made the same claim respecting Netflix, where talent is not commoditized, and has a history of negotiating a fairly consistent share of revenue over time. There, it’s not reasonable to characterize Netflix’s costs as fixed, in the big picture. So it’s importantly to look more closely, rather than to assume that outright purchases of content translate to a long-term fixed cost structure independent of subscriber count/revenues."

ksec• 7 years ago

Fix Cost in the sense that it likely doesn't go up with more players. Apple are like the Game Publisher here where they pay a specific price for games from Studio. And remember all these games are exclusive to Apple Arcade.

You see comments questioning whether this is fair. And of course it is, Gaming Business are quite risky, Out of 10 games you could have one Game that makes all the money while the other 9 have millions throw out of window. Apple is letting these developers avoiding those risk for a likely fixed up front price and terms.

And it is the same with Apple TV+, all the shows are Apple Exclusive, it doesn't matter if they have Zero viewership. Apple has already paid for it.

This is compared to Apple Music, where Apple have to paid for every song streamed. And it is not a fixed cost.

I sort of disagree about "Pure Profits" from Services like Apple TV+. Name me one of these business that is even profitable, especially when you are looking ahead with Disney+. The Roku platform examples completely ignore they sell data to advertiser.

Apple is using this to dilute their profits margin from Services, or add value to their Active Users. Both the App Store and Google Search Engine Placement revenue has close to 100% margin. Something you don't want to show up in your quarterly report. By having Apple Music, Apple TV+, Apple News that operate at close to 0% margin, Apple manage to make that 100% margin down to ~50%. And it will be another moat in their ecosystem, who wants to enter a business, News, Music, or TV when there are no money to be made?

achow• 7 years ago

Not announced in the event but mentioned in the article; this is a very telling indicator as well of Apple's service strategy..

AppleCare+ monthly plans switch to subscription model

https://9to5mac.com/2019/09/10/applecare-monthly-subscriptio...

Spivak• 7 years ago

I think overall people are right that Apple wants to get in the services game but this specific example I don't think is particularly telling. This is something people have been asking for for a long time since the 2 year policy is super awkward for a device you might keep for 5 years.

It will be telling when the monthly cost is lower than the up-front price.

gumby• 7 years ago

Do they plan to switch or merely offer it as an option? A monthly fee has been available for a while; what's new is that you can go beyond two additional years.

agumonkey• 7 years ago

Naively I thought it was apple watch + healthcare::

rietta6• 7 years ago

How will the subscription work in relation to credit card company's automatic extension on manufacturer's original warranties is a question. AppleCare is not like an extended warranty from another party, it's direct from Apple. This is a big deal when it comes to credit card warranties.

When someone buys an Apple device with a major credit card they can get the time Apple offered the warranty and then an extra year (2 years for American Express) after the conclusion of the original warranty. With a subscription, I suspect the credit card warranty may become voided or would only extend the original default warranty of the device.

Amex has refunded me money to repair multiple MacBook Pros and an iPhone when the devices failed after AppleCare expired but before the automatic extension had expired.

rietta6• 7 years ago

There are numbers in the article.

So pay up front on the more expensive phone is $149 for 24 months or $7.99 monthly. 24 x $7.99 = $191.76 (42.76 more than up front). But what for the American Express customer, buying the phone. He or she gets the Apple 2 years plus 2 years from Amex so 48 months of coverage for the original $149 vs $383.52 paid via subscription (a $234.52 savings).

Someone keeping the phone the full 60 months it receives support from Apple would pay a total of $479.40 in AppleCare+ premiums. They did get an extra year of support from Apple vs that of the American Express customer paying up front at an effective aggregate cost of (479.4−149)/12 = $27.53 per month in the final year for coverage.

The American Express customer must of course also be saving for the replacement of his or her iPhone in 48 - 60 months. Presuming he or she wants to have the cash ready if the phone dies in month 49, they must be setting aside (999 × 1.08) ÷ 48 = $22.48/month for 48 months and then can coast for the final 12 months maybe earning a little interest before buying the new phone released in September 2024.

neya4• 7 years ago

That stil doesn't explain why the keynote was so boring. For the first time, I had had enough and closed it and walked away. Usually, Apple's iPhone announcements are pretty exciting. This time around, even the presentation itself felt like a giant corporate presentation sprinkled with keywords like "innovation" to make me believe they were innovating. There was nothing innovative about the keynote. The iPhone is a laggard at this point and there are far superior offerings at this point.

A few years ago, I wouldn't have said the same and would have even ridiculed if someone claimed Android phones were better, but after playing with an S10+, iPhones really don't impress me anymore.

"But it offers more privacy?" Nope. Didn't you read about the part where all your personal siri recordings were played out by contractors? Including sex acts and arm deals? What happens on your iPhone does NOT stay on your iPhone because it's proprietary software. Duh.

I'm done with Apple. But I'm also looking for something beyond Android at this point. Wish there was a truly 100% open source phone I could trust.

saagarjha• 7 years ago

there are far superior offerings at this point

Such as?

all your personal siri recordings were played out by contractors

Nit: not all, just a fraction.

simonh4• 7 years ago

Pretty much all the voice assistant companies have been caught having people listen in at this point. Amazon, Samsung and Google for sure at least. It is pretty disappointing to find Apple in on the act as well though.

snowwrestler• 7 years ago

There is literally no other way to apply machine learning to such a large problem. The system must have training data to learn from; as you expand the scope of your ML system, you must expand the scope of your training data.

Every large commercial ML system works this way. Google for years has paid people to manually score and categorize search results pages, to provide training data for ML web search systems.

It would have been better if companies were up-front about this when talking about "artificial intelligence" in their voice products, so it doesn't look like a nasty surprise.

And in the long run, everyone will benefit from some consistent regulations on ML data scoring, like HIPAA for health care (another industry where for-profit companies handle very sensitive customer data).

neya4• 7 years ago

Yet only Apple advertises "What happens on your iPhone, stays on your iPhone"

alexashka2• 7 years ago

Apple's strategy is holding on to the brand, while competitors slowly chip away at their market share, awaiting a mortal blow to their entire hardware-centric business strategy from cloud-first computing.

Once most business software has a cloud equivalent that can run via an internet connection (Google is already trying to roll this out for gaming, wrong direction of course), Windows and Mac are finished.

Once Windows and Mac are finished, it'll only be a matter of coming up with a new phone os that can run on 50-100$ devices (or android, yuck) and then Apple is really finished.

Who's going to spend 2k on a macbook, 1k on an iPhone and 500$ on a watch, when you can have a 200$ computer, 100$ phone and 50$ watch that do nearly the same thing. Oh, and a 200$ point-and-shoot camera that'll forever beat any phone-camera due to camera size limitations inherent to phones. In fact I predict the next big consumer hit will be a point-and-shoot camera with a phone os.

Microsoft knows this, Google knows it too - they're building out planet-wide infrastructure for cloud-first computing that's coming. Apple is jerking around with 0 progress on all of its platforms, milking brand loyalty, producing pretty, severely over-priced trinkets (awful battery life, awful keyboards, awful screen burn-in, insane ssd prices, awful ports requiring insanely over-priced adapters) to signal allegiance to a middle-class or up caste, and making their shareholders short-term rich, while long-term poor.

majormajor• 7 years ago

Once most business software has a cloud equivalent that can run via an internet connection (Google is already trying to roll this out for gaming, wrong direction of course), Windows and Mac are finished.

The desktop software I use day to day (IntelliJ, Zoom, Slack) already runs on Linux. The rest is already in the cloud.

And yet, of my coworkers, we have about 1 in 50 folks running Linux instead of Mac. It's been this way for the last 6 years - I was actually on Linux in 2013, but have come back to Mac because it's still just all put together a bit nicer in both software and hardware. My last job even discontinued Linux support in that time period.

At my partner's job, they also run on google docs and gmail, but since it's not a software dev job, it's 100% on Mac, without even that small Linux fraction.

nojvek• 7 years ago

Running crap on cloud works great until you’re above the cloud or really below the cloud. Powerful edge devices will always be valuable. iPhone is prolly one of the most powerful edge devices out there

prepend• 7 years ago

I run Mac because it’s the simplest Unix laptop. I think this might change a bit with windows new embracing of Linux as part of the desktop OS. My hope is that by win11, they’ll have better integration and some hardware manufacturer will make a laptop that’s light, big, and has a good touchpad.

neya4• 7 years ago

Not just that, they've resorted to misleading advertising practices at this point. That is so unlike the Apple we used to know.

https://www.facebook.com/groups/ih8apple/permalink/101564623...

beautifulfreak• 7 years ago

Products becoming commoditized won't take Apple by surprise. Think of how they survived commoditization of mp3 players, "disrupting" the iPod themselves. They pay attention to logistics curves and can predict with great certainty how viable their products will be long into the future. If the bottom drops out they won't be standing on it, partly because they will always remember the Windows disruption of the 90s. That's just my opinion. The same author offered his opinion in 2010, addressing your point, and drawing upon "The Innovator's Dilemma" by Clay Christensen.

https://stratechery.com/2010/apple-innovators-dilemma/

neya4• 7 years ago

Downvoters should actually explain why they think this comment doesn't add value or violate guidelines rather than just get butthurt about it and react. How typical.

sbuk• 7 years ago

I believe the comment doesn't add value becase;

a) It's supposition presented (somewhat aggressively) as fact.

b) It's the same old trite "Apple is doomed" prophecy that is trotted out every time there is a product announcement.

As to your comment;

"Please don't comment about the voting on comments. It never does any good, and it makes boring reading."

Terretta• 7 years ago

Apple's strategy is holding on to the brand, while competitors slowly chip away...

This generation could indeed mount the first meaningful blow to legacy PC-based gear as primary device, but it's not coming from a competitor.

Once Windows and Mac are finished, it'll only be a matter of coming up with a new phone os...

Did you miss Apple's "What's a computer?" campaign?

iPadOS 13 is the new tablet usability OS for the only primary device quality tablet on the market.

Using a USB-C dock, my same desktop gear works with my MacBook or my iPad Pro. I can even use my full size monitor, keyboard, and trackball driving Windows in a Citrix VDI.

- - -

In fact I predict the next big consumer hit will be a point-and-shoot camera with a phone os.

That was already a thing in 2012: Samsung Galaxy Camera. They also tried the Samsung Galaxy NX, and the Samsung Galaxy Camera 2.

Didn't catch on, but hasn't stopped people from trying over and over:

https://www.theverge.com/circuitbreaker/2018/11/5/18064048/y...

Started shipping this August in China:

http://thenewcamera.com/yongnuo-yn450-4g-mirrorless-shipping...

Turns out, it's pretty difficult to beat the utility of "the camera you have with you" form factor of a more typically shaped smartphone.

alexashka2• 7 years ago

Interesting response, thank you.

Those mirrorless camera-phone things you linked look like Microsoft tablets before iPads came. Microsoft had the idea, just not the execution chops, for many many years.

It's only confirming my conviction that it is an unbelievably potent idea, that needs a few billion poured into it to do it right.

Regarding PC vs tablet vs phone - that is not what I'm thinking at all. It is not a matter of dummies wanting OSes for 7 year olds as their primary device, it's that computation will not be done on your hardware, it'll be displayed on your hardware aka pretty lcd/oled screen. Cameras are the one exception to this rule which is why I predict it'll be regular thin screens with super fast internet, and more bulky (size of current iPhones) with replaceable lens and specialized GPUs for processing raw camera input.

This is more obvious with games - instead of everyone having a 2k gaming rig, everyone will have a 200$ monitor with a fast internet connection, connecting to super-computers run by Google. It's basically Unix multi-user, except now done via 'the cloud'. That's the future - and Apple has no place in it with its 30% profit margins on hardware.

I think Apple knows it in the long term too, which is why they're slowly and awfully, getting into content aka games and tv.

kart23• 7 years ago

Its smart. A lot of people didnt upgrade to the X, and the lower price makes it very appealing to get the 11. Apple tv+ seems like a great deal at only 5 dollars, and should attract tons of new customers, even though the service really doesnt have a great width of content, but apple is good at hiding that, marketing it as a viable alternative to netflix. Shareholders will be very happy at the next earnings call, and the stock has already been showing that.

mikorym2• 7 years ago

Did anyone notice that nowhere in their keynote address they mentioned macbooks/laptops?

Maybe I missed something, but that is crazy to me. Sure they make their money with iPhones, but their macbook lineup is what I am interested to hear about.

nkkollaw• 7 years ago

They'll have another event in October for that.

mikorym2• 7 years ago

Ok right, then it makes sense.

addicted• 7 years ago

I think stratechery has some good analysis, but too much of it is framed from an Apple fanboi perspective. It reminds me of what a grown up, financially focused, version of RoughlyDrafted would look like. And after having been an Apple fanboi for a few years but not anymore, it’s hard for me to read.

As an example, this article itself justifies Apple’s 2016 keynote as being innovative because accessories revenues have doubled since. Doubling of revenues could mean and imply many things, but innovation is hardly one of them.

edmoffo• 7 years ago

The service is not the weakest part of Apple. Instead, is the complete lack of innovation nowadays. They lost everything since the death of Steve Jobs. Unfortunately.

The iPhone and Apple's Services Strategy

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