Apple’s Model Is Under Pressure

May 23, 2016

John Gruber on Apple’s motivation to build services:

I see Apple “monetizing” Siri simply as a way to sell more devices — more iPhones now, more iPads (and who knows, maybe Macs?) in the future. Siri could be the interface to future products, like tiny little Nano-sized devices, or home entertainment systems. Google’s ad-driven model disrupted Microsoft’s pay-for-software-licenses model. Apple’s just-buy-our-devices-and-look-at-all-the-cool-shit-you-get-with-them model could disrupt Google’s ad-driven model.

The just-buy-our-devices model has worked for 18 years for Apple in the personal computing market. Horace Dediu calls this market unforgiving: almost all its competitors are dead or dying. As the personal computing market matures overall1, however, cracks in this very model are beginning to show. Consider un-Apple-like moves of selling 16 GB iPhones/iPads2 and offering 5 GB out-of-the-box iCloud storage—ways to up-sell buyers which work surprisingly well from a financial standpoint. For the ecosystem as a whole, they suck:

  1. A 16 GB device discourages users to download apps and explore the breadth of the ecosystem. A 16 GB phone works for my mom, but not a 20-something first-time iOS user. iMovie is a 1.1 GB binary. A minute of 4K video on iPhone 6S is a minimum of 250 MB. Users choose Quip/GDocs over iWork. Games preferred over creative apps
  2. 5 GB iCloud storage limits iCloud Drive/Photos sync adoption. Users instead download Google Photos which saves device space, unlimited storage, fast sync, and availability everywhere. Perhaps Dropbox for documents
  3. Skimping on iCloud Storage makes users lax about backing up OTA. Users probably connect their phones to iTunes to back up and transfer any data
  4. iTunes becomes a virtual OS on PC/Mac. More stuff is tacked on to iTunes. There’s clear strategy tax here.

None of these issues are undocumented. Apple services is perceived to have a limited addressable market. Google Services works everywhere; Microsoft Office works everywhere; AWS is platform-agnostic. A services story is incomplete without addressing the issue of cross-platform support to monetize as many users as possible. This puts pressure on Apple’s model as physical device sales slow down: The company will continue to make contentious decisions on hardware and the default software/services experience to up-sell users as it’s currently in this strange matrix depending on high profit margins on both sides. The tenth-generation iPhone will most certainly differentiate between the 4.7-inch and 5.5-inch models in camera/memory/storage capacities not only to increase iPhone ASP but also make up for lost margin to increase default services options/iCloud storage.

I hesitate to write this post before Apple plays its cards at WWDC 2016 but I believe Apple is, right now, going through a very difficult shift trying to match expectations as a hardware manufacturer in a physical-device-as-cloud-endpoint world.

This brings me to my final point: while Apple’s model is under pressure, it does not warrant yelling from the rooftops. Apple the company has pivoted in nearly every decade of its existence: Apple I to Apple II in the ’70s; Apple II to Macintosh in the ’80s; Macintosh to iPod in early 2000s; iPod to iPhone in 2007. New Apple excels at product/profit shift in mature markets in the middle of major company-wide pivots. The Mac OS 9 to Mac OS X transition while the pivot to handheld devices/consumer electronics was underway: iTunes and iPod were developed in quick succession as points of leverage. The transition to Intel chips in Macs just before pivoting to the iPhone company: iPad, iMessage, iOS 7, Apple Watch serve as points of leverage today. They are developed to manage shifts within the pivot itself: low-cost PC threat in a mobile world? iPad. IM solution? iMessage; Dated mobile UI design in a world of high-resolution displays? iOS 7; Wearables and smartphone extension points? Apple Watch; Music streaming? Apple Music; The services shift is no different. If AI development is accelerating and if components are reusable, an educated guess would be that Apple, the product company of our time, can build things people want and can turn this to become a point of leverage in the future, too. Apple moves fast. It remains to be seen how well Apple rides the iPhone/services wave and builds Apple Watch, Beats, Apple TV as multi-billion dollar3 businesses. Before it publicly reveals its next major pivot, of course.

  1. By “personal computing market” I mean the concept as a whole: the hardware/software model encapsulating desktops, laptops, smartphones, tablets.

  2. Ask yourself if you truly believe 16 GB baseline models exist for enterprise/education markets. Because if you do, I have a bridge to sell you.

  3. A multi-billion dollar business at Apple scale is $5-15 billion.