Why Apple’s Shift to Subscription Services is the Right Move. For Now.
With Apple’s run of rapid and disruptive innovation having stagnated, the company needs to look elsewhere for revenue.
The announcement of Apple’s new subscription services comes less than three months after the company announced they adjusted down their projected revenue— largely due to a drop in iPhone sales. In his letter to investors, CEO Tim Cook pointed to the strength of the dollar and “challenges” in emerging markets such as those in Asia (read: China) as the main reasons for the revised forecast. The launch of Apple TV+, Apple Arcade, and Apple News+ comes as a convenient distraction in turbulent times, but is nothing but a faint attempt to take the focus away from the real problem — it’s been over a decade since the company disrupted the tech industry with a brand new device.
Apple won’t revolutionize the industry with TV+, Arcade or News+. In fact, given that iTunes has been around for nearly two decades, one could say they’re late to the game. Netflix, Amazon Prime Video and Hulu have been around for years, allowing them to grow a strong foothold in the market for video streaming. Apple’s advantage is that it can seamlessly integrate its media services with its devices, which gives them easy, low-cost exposure to a relatively big market. However, Apple launching subscription services doesn’t count as innovation — it’s a half-hearted attempt to stay afloat.
The Jobs era
Steve Jobs’ return to the company in 1997 was followed by a decade of what was arguably the greatest run of innovation a company has ever seen. Apple introduced one earth-shaking device and service after the other. The iPhone, iPad, iPod, iTunes, App Store — the list goes on. These products created brand new industries (such as the mobile app industry, projected to be worth $189B by 2020), and shook already established industries to the core (Nokia never recovered after Apple’s launch of the iPhone in 2007).
Apple succeeded because they understood what Nokia didn’t — that 99% of customers don’t care about hardware. They take it as a given.
Apple succeeded because they understood what Nokia didn’t — that 99% of customers don’t care about hardware. They take it as a given. What users care about is software — the design, user friendliness, simplicity and last but not least; branding. Apple’s customers care about status and image, and want the latest, thinnest, most technologically advanced model. But only if it makes you stand out from the crowd, and your friends envious.
The first few editions of the iPhone saw tremendous change to both design and functionality, however this has plateaued since the release of the iPhone 6. Most people would now struggle to tell the iPhone 6 and iPhone 8 apart. With pricey new models being almost indistinguishable from their predecessors, where is the incentive to pay twice the amount for a product compared to what it would cost elsewhere? It seems like the company, which was rooted in the notion of exclusivity and innovative design, forgot about its core principles.
When Apple launched the first iPhone in 2007, the market was flooded by tiny Nokias and clunky Blackberrys. Now the market is flooded with different versions of the iPhone — 6, 6s, 6s Plus, SE, 7, 7 Plus, 8, 8 Plus, X, XR, XS. The iPhone XS Max just doesn’t pack the same punch.
The Cook era
If the Jobs era was the time of great innovation, the Cook era was the time for reaping the rewards of those innovations. But despite raking in 87% of global smartphone profits, there is a legitimate reason for concern after iPhone sales revenue dropped 15% in Q4 last year. With 52% of Apple’s revenue coming from iPhones, the company has clearly just taken a major hit.
With no significant innovations since Jobs’ death, it’s natural for the company to start looking elsewhere for revenue. And with consumption of digital media on the rise and a video streaming market anticipated to reach $125 billion by 2025, media is the natural place to look. Apple is slowly transitioning into a different kind of company that isn’t so reliant on devices, but increasingly focuses on subscription services instead. However, in order to remain a $1 trillion dollar company, it can’t rely on getting its revenue from a subscription service with a small market share.
Companies evolve. They’re always looking for new streams of income. Nokia went from producing car tires to making mobile phones. Today, no one would say that was a bad move. However, despite Nokia’s eventual fall from grace, Apple should remember the following: Nokia created a new industry when it switched from producing tires to mobile phones. Apple, on the other hand, is currently elbowing its way into an already crowded, established marketplace.
Rapid growth of its media division is likely to make investors happy. However, despite the potential for growth, revenue from services currently makes up a mere 11% of Apple’s total revenue. Therefore, Apple’s media subscription services will work as a lifering for now. But if no bigger ship comes to save them, they won’t be able to keep their head above water forever.
