Apple’s Pivot to Services with an Acquisition Spree
About a year ago, on March 25th 2019, Apple announced in its special event in HQ that it is transitioning into a service company. The event at the time was met with skepticism from Wall Street. Many growth investors have a negative view on the shares with short interest at the highest it has ever been over the 2 year period prior to the event.
Indeed, as the S&P sub-index put Apple from the Growth Index into the Value Index, the charm might have lost on users and investors alike. Facing sky-high prices and falling iPhone sales (-15% in FY 2019), it is unclear where the growth drivers come from. The Marquee event downplayed the iPhone innovations and even the wearable segments. Instead, Apple rolled out the transition into a services company.
Despite Apple’s corporate communication efforts, Wall Street continues to dismiss Apple as a services company.
But that was a year ago. Over the past year, Apple ramped up its services front with serial acquisitions eyeing critical players in the app ecosystem (i.e., data providers, high IP companies, content providers) and positioning itself for the future.
Just last week, 3 attention-grabbing acquisitions were announced- Dark Sky, NextVR, Voysis. Receptions are mixed. However, I believe these 3 acquisitions, along with many other developments at Apple, exemplified Apple’s ambition as a services company.
Dark Sky
Many critics lamented the end of Dark Sky, not only for the users and developers but many also questioned why Apple’s decision. For one, 70% of Dark Sky’s users are Android users. For two, the 500,000 subscribers Dark Sky currently has at $4 each is a drop in the bucket for Apple in terms of revenue. Even with an undisclosed purchasing price, it is still hard to see Apple squeezing out much value for the acquisition.
However, perhaps the reach to android users is part of the strategy. In 2015, Apple Music launched its Android version. Subsequently, almost all services Apple provides today are device agnostic. Outside of the US, Android users still make up a big proportion of the population. Apple could leverage Dark Sky’s technology, complete its data with global weather data, and open it up again with API to developers and as an app to Android users all over the world.
NextVR
The $100 million acquisition was also met with mixed reviews. There are some concerns over the lack of readiness for their hardware models to support such intense usage. However, this might be another move for Apple laying the groundwork. The company has developed an API called ARKit specifically for this purpose. When it comes to applications, Apple has the biggest collection of AR apps in the App Store, in various categories like gaming, educational, health and more.
Voysis
This is not the voice AI company that Apple has bought. In as early as February 2019, Apple has bought the voice AI company PullString. While PullString makes experience voice design tools (its iconic Barbie voice that was part of a partnership with Mattel), Voysis’ focuses on voice search. According to Loup Ventures’ Digital Assistant IQ test, Siri lags behind Alexa and Google Assistant in the voice “commerce” category. Siri is having a hard time understanding that you want to spend more money with Apple, which is apparently not good and the problem Apple is keen to solve with this acquisition.
Cisco has set an example of acquiring talents, IPs, and startups during the last recession. In a way, Apple might be doing the same now. Managing the long term in a crisis is easier when you are flush with cash. And if those efforts are successful, Apple could outperform peers and expectations coming out of the current downturn. Indeed, Citi’s Research has shown that the technology sector outperformed the broader markets coming out of the 2 prior pandemics (SARS, MERS).
What do you think would be Apple’s next target? How successful is Apple’s transition into a services company?
Speak soon,
Whitney
