Apple Wants a Cut of Everything
With iPhone sales stagnating, services are the future
It must be tough being one of the largest publicly traded companies in the world. One quarter, you have to admit the sales of your marquee product are stagnating, then all of a sudden you have to reinvent your business model because after Mac, iPhone, and iPad, the product idea well is pretty dry and only churning out iterations on your competitors’ successful products and new sizes or colors of your own.
But have no fear, Tim Cook knows that monopoly means power — and money.
Cook has been a CEO for the shareholder — that much is clear. He got Trump to back the tax cuts he’d been lobbying for, increased the dividend, and became laser-focused on the share price at the expense of the product line. Maybe it’s the lack of product innovation or customers getting fed up with the constant price hikes, but either way he needed to pivot, and he knew exactly where to go.
Apple’s services category has been growing for some time, so much that it made up 13 percent of the company’s revenue in Q1 2019 — more than Mac, iPad, or the Other Products segment. It also happens to have a gross margin of 63 percent — meaning there’s very obvious incentive to grow it.
Service means a lot of things to Apple. In its March 25th keynote, Cook said a service is “the action of helping someone or doing work for someone.” If you say so, Tim, but that’s not what Apple’s services do.
Let’s get the keynote out of the way. In a single show, Apple announced a slew of new offerings: a magazine and news subscription service called Apple News Plus, a network subscription option with the TV app called Apple TV Channels, its own video subscription service for its first-party video content called Apple TV Plus, an iOS game subscription called Apple Arcade, and the Apple Card credit card, in partnership with Goldman Sachs and Mastercard. These fall into a number of different categories.
First, there are subscription products: iCloud, Apple Music, Apple TV Plus, Apple News Plus, Apple Arcade, and Apple TV Channels could fall into this group. These subscriptions are sometimes for content or services from Apple, such as iCloud and Apple TV Plus, but more often they’re for third-party content which Apple packages and advertises to its 1.3 billion active iOS users. And for that, Apple takes a piece.
Tim Cook knows that monopoly means power — and money
Second, there are its stores: iTunes and the App Store, but Apple TV Channels could also fall into this category since users will be able to choose individual channels to subscribe to. In exchange for providing these platforms — in the case of the App Store, the only way those products can be accessed on iOS devices — Apple ensures it gets a cut. And to be clear, it isn’t a small one: Apple takes 30 percent of iTunes and App Store sales, and reportedly demanded 50 percent of Apple News Plus revenue, despite the dire straits of journalism’s business model.
Spotify even filed a complaint against Apple in the European Union over how it controls its platforms, arguing its actions amount to anti-competitive practices. The 30 percent charged on Spotify subscriptions makes it appear more expensive than Apple Music, and Apple promotes its own service in the App Store and gives itself an exemption from a rule prohibiting notifications about subscriptions. The rules also make it difficult for companies like Spotify and Netflix to communicate with customers about alternative means to subscribe, and Apple has been known to hold up their app updates.
Third, Apple has gotten into finance with Apple Pay and Apple Card. Through Apple Pay, customers can use existing cards to make purchases and Apple takes a small percentage of every transaction, while Apple Card will essentially make Apple your credit card provider, letting them take an even bigger piece of every purchase made outside the Apple ecosystem.
There’s a word for how Apple is placing itself in the middle of so many transactions to take a percentage for itself: it’s called rentierism, and it’s a fundamental part of the platform business model Apple is embracing as its product revenues stagnate.
In his book Platform Capitalism, Nick Srnicek writes about what post-advertising platforms might look like: “rent is extracted from the use of a service and, given the monopoly position of these platforms, alternatives remain out of reach.” Even though Apple isn’t transitioning from an ad-based model, Srnicek’s description sounds a lot like the strategy it’s trying to pursue in order to keep investors happy.
Apple may not be a monopoly in the conventional sense, though the mobile market is quite clearly an oligopoly. But when it comes to its products, and those using iOS in particular, it has a lot of power over what’s made available to users, and it’s using that power to be the middleman and scrape off a piece of every transaction for itself.
There’s a word for how Apple is placing itself in the middle of so many transactions to take a percentage for itself: it’s called rentierism
I have little doubt that Apple’s pivot to services will pay off for investors: they don’t cost the company very much to deliver, but the returns can be significant. However, these kinds of practices are exactly why the public’s appetite for antitrust action against major tech companies is growing.
Should Apple really be able to use its market power to place itself in the middle of so many transactions to take a cut? No, it shouldn’t. But in this debate about whether to break up big tech, platforms like the App Store can’t just be broken off into a separate entity, they need to be regulated as public utilities to ensure the owner can’t give an unfair advantage to their own product, such as the case of Apple Music and Spotify.
Until that happens, Apple will use its dominance to reap rentier profits, and users, content creators, app developers, and others will have little ability to challenge it for fair terms. However, the prospect of action is clear: the E.U. will likely take Spotify’s complaint seriously and voters should ensure whichever Democrat wins the presidential nomination is serious about taking on the power of tech monopolies.
Apple may be the focus today given its new services, but it’s just one example of a whole sector using its market power to privilege their own products and tax every transaction that goes through their digital platforms. And it’s long past time to rein them in.
