iPhone is Killing Apple? What is Tim Cook’s STRATEGY to fix it?
On the 19th of august 2020 apple became the first company to hit a mind-blowing market cap of 2 trillion dollars. As soon as this announcement happened, it reinforced how big and powerful the apple brand is but on one side the company was breaking new records and hitting new benchmarks. On the other side, there are some tough challenges that apple is facing in the sales of iPhones. Apple’s most important product has not peaked in sales since 2014. The company is being sued with anti-trust cases in the European Union and giant players like epic games and Facebook are openly revolting against its policies.
So the question is what is this ongoing trouble that apple is facing? what is Tim cook doing to de-risk apple from this crisis and most importantly as investors what are the pointers you need to keep an eye on to understand the upcoming wave of technological disruption?
But more on this at the end this is a story that dates back to 2007. When Steve Jobs made the groundbreaking announcement of the iPhone as soon as this announcement happened the world went crazy. It turned the iPhone into a sensation and every single year, whenever a new iPhone was about to be launched the craze and eagerness to see the latest product never came down and the reason.
Why does this happen? Was because iPhones that apple launched back then were genuinely groundbreaking and if you look at the delta between the iPhone and other phones, you will see a stark difference in both of them to tell you about it while other phones had quality keypads, the first iPhone was revolutionary because of a huge leap into the touchscreen and the introduction of the iconic app store, while other phones were catching up with touchscreen iPhone 3g was twice as fast as the iPhone and the app store began to have a ton of apps which increased the utility value of the phone by a large extent.
Similarly, iPhone 4 was groundbreaking because of its facetime, HD recording camera and most importantly the announcement of iCloud which enabled apple users to navigate between apple devices seamlessly. And, to be honest, only apple users can truly appreciate how legendary iCloud was and then we had the iPhone 5 which had fingerprints and Siri was fully functional this was followed by the iPhone 6 which is not just one of the best-designed phones in the world but also set the gold standards for a camera in a mobile phone this is the reason why iPhone 6 became the highest sold iPhone in history with more than 222 million units sold but by this time that is by 2015.
Apple had dangerously become dependent on the iPhone wherein more than 60% of the entire company’s revenue came from just iPhone sales. And this is where things started to change as tech got more accessible and competition began catching up. There were only a limited number of groundbreaking announcements that apple could make for the iPhone and as we saw every other phone started having fingerprint face unlock a great camera and all thanks to google. Google Assistant seems to be way better than Siri now and not so surprisingly. iPhone after touching a record of 231 million units. Has not peaked in sales in six years now and although in 2021 the revenue went higher than in 2015 with the drastic increase in the cost of the iPhone the unit sales still seem to be lower than in 2015. Therefore apple is on the words of hitting the ceiling because it can no longer increase the price of the iPhone there is very less scope to acquire new users unless the price drops drastically. And lastly, if the price drops the profit margins are going to take a hit so with the most important pillar of apple’s profit at stake.
Now the question is what is apple doing to de-risk itself? The answer to this lies in an announcement made by Tim cook in 2016 when he said that apple plans to double its revenue from software services by 2020. This essentially meant that apple is now going to transform from being a hardware company to becoming a software service company. How apple built its ecosystem with three types of products. The first was the entry product that got you into the ecosystem then you had retainers. Which are services like iMessage apple arcade, filmic pro. Or for that matter even your Spotify playlist that kept you hooked. Because of this when you go to buy another laptop you are more inclined to choose a MacBook pro, which is an upsell product and then after you buy the second apple product, you have these special ecosystem features like airplay airdrop continuity and iCloud that tie these devices so well together that it makes it even more difficult to break out of the apple ecosystem.
Catch is here
But now apple wants to make a small change instead of having these apps just act as retainers apple wants to build more apps and services and turn them into money machines so in short apple is deploying the Razer blade model.
The Razer blade model is a model wherein a company sells the first product at lesser margins so that they can sell you a low-cost high margin product regularly to create a recurring income for the company
Now in the case of apple, this is a very very big deal because we’re talking about one of the most powerful companies in the world that are transforming its business model apple is so powerful. That is both capable of creating a new category of products as well as disrupting an age-old industry.
A classic example of the same was the iPad which created a new category of devices. And then we saw an age-old industry being disrupted by the apple watch wherein, within just two years apple went to beat a hundred-year-old company like Rolex to become the largest watch manufacturer in the world.
So now the question is why is apple specifically getting into software services and how is it going to affect the industry leaders in different domains? For starters just like the basic principle of the razer blade model selling software services is a high-margin recurring income channel. On top of that as a by-product, they also act as retainer hooks to keep users in the ecosystem. And if you look at the numbers it’s quite prominent from 2015 to 2021. While the revenue from iPhone has steadily risen from approximately $ 155 billion to $ 191 billion dollars. This is an increase of 23.8% of the revenue from services has shorter by 243 going from just $ 19 billion to 68 billion dollars. And the catch over here is that according to Statista while the profit margin from the iPhone is just 35 %. The margin from software services is nearly 60 % in fact App store was being run at a profit margin of 78% as of 2019.
According to Bloomberg so the Question is whether apple entered the saas or software as a service domain. What are the disruptions that apple is going to cause in different industries?
Well, as far as my research is concerned there are three specific areas that apple will try to cash in first. And the obvious voltage is using the aggregator superpower to tell you about it. Since apple has a ton of data about which apps are the best-selling apps in the app store. And has accurate details about who buys them and what they use them for apple could directly launch a service. That is in direct competition with an existing app for example in India while a Spotify family subscription for ios costs Rs 199, Apple Music costs only Rs 149, And the catch is here if you use Spotify premium on iPhone apple gets 15% which is Rs 29 and if you use apple music apple gets Rs 149 as its own revenue. So this way Spotify is at an unfair disadvantage where it either has to raise its prices or cut its margins short.
Whereas apple wins both ways this is the reason why there is such a big buzz about the anti-trust case against apple in the European Union. The second way is by getting into super high potential spaces which include healthcare and fintech. And as you must have seen already they’ve already laid a solid foundation with the apple Cards and the apple watch. While on one other side of the plate apple customers are by default the most premium audience in the world making them the perfect audience for financial services. On the other side of the plate, The Apple watch already has a tremendous amount of data to sell health care services to its customers. And this is such a revolution that it has a huge scope of application an ageing parent could share their heart health data with a family member a person could choose to share their fertility window insights with their partner, and even a park in son’s patient can share their mobility data with a physical therapist this also includes backend integration of data. Because of which healthcare centres all across the united states can seamlessly access and share patient data with each other this will enable patients to get done with hospital procedures within a few seconds as compared to the existing tedious procedure.
This is how apple is laying its foundation into a much-needed healthcare system starting in the united states, therefore with the apple card and the health app, it wouldn’t be surprising if apple became the biggest health insurance company or even the largest credit card company in the world.
And lastly, we have new product launches like the car project and apple Glass which could go on to become the next major pillar for the company. So the question is apple is really in trouble well as far as I can tell you with apple so aggressively pursuing the software services sector. And with the launch of the M1 chip apple is just getting started for the next big revolution. In the tech world and this brings me to the most important part of the article and which are the pointers to look forward to. There are three things that I would highly recommend you to study the first thing you need to keep an eye on is the fintech revolution brought by the ant group which is something very very similar to what apple is capable of. The second thing that I would recommend you to study is the transition of Microsoft from a software product company into a software services company and when you understand the transition of both these tech giants it will give you an eye-opening insight into the saas wave which is literally the next big thing in the next five years. And thirdly what do you think about how google is using its aggregator superpower to take the next big leap in tech?
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