Apple's management is starting to tell a new type of story, and it's key to understanding its growth strategy.
Apple's management is starting to tell a new type of story, and it's key to understanding its growth strategy. Listening to management and fitting what I heard into what I'm seeing globally in consumer markets, I believe Apple's growth thesis is built on the following assumptions.
Apple's management is starting to tell a new type of story, and it's key to understanding its growth strategy. Listening to management and fitting what I heard into what I'm seeing globally in consumer markets, I believe Apple's growth thesis is built on the following assumptions.
Apple's Experience as a Service
Apple is trying to position itself as not just a pure-play hardware company.
At first blush, this sounds like a tough argument to make. However, it is essential that it is made. Having studied the history of this industry, we can predict time and time again a market shift from hardware to software to services. This is why a company like Google or Amazon, which started off as services companies, are valued the way they are. Wall Street doesn't love hardware companies (see Fitbit and GoPro) but it does love software and services firms.
Apple is trying to position itself as not just a pure-play hardware company.
At first blush, this sounds like a tough argument to make. However, it is essential that it is made. Having studied the history of this industry, we can predict time and time again a market shift from hardware to software to services. This is why a company like Google or Amazon, which started off as services companies, are valued the way they are. Wall Street doesn't love hardware companies (see Fitbit and GoPro) but it does love software and services firms.
Apple makes most of its money in hardware, but building the services narrative is central. This is exactly what it's doing by making the following points:
1) Our installed base is large and growing.
2) Our customers spend a lot of money in our ecosystem.
3) Our customers never (or rarely) leave us.
These points were part of an overarching story Tim Cook told on Apple's recent earnings call.
The services story compounds. Some time ago, a very smart executive told me the most brilliant thing Apple did was sell you a piece of hardware, the iPhone, and get you to spend $1 a day (on an app). That was early in the adoption cycle of iPhones when apps were all the rage. Now, Apple is looking to get you to spend a predictable monthly amount on everything from cloud services, like iCloud photo sync and storage, Apple Music $9.99 at Apple Store, and eventually a TV service, along with anything else.
Look at the services story this way. Let's just say, beyond the hardware margin, Apple succeeds in having its base adopt Apple Music for $10, Apple TV for $20 per month ($50 for family), and cloud storage and all data in sync for $5 per month. If it gets 100 million people, or less than 20 percent of its user base, to buy into this, that is some pretty significant revenue from services. It's not that much of a stretch given what we know about how much Apple's customer base tends to spend in the ecosystem. Last quarter, Apple made $5.5 billion in services. If that continues, it should make over $20 billion from services in 2016.
Well Positioned as Consumer Mature
Apple has seen that as consumers become more mature in their technology needs, more and more people turn to Apple. This is why Macs outperform the PC market. As consumers' PC needs mature, Apple is attracting more customers looking for greater value, product quality, customer service, longer life, lower total cost of ownership, and more.
Apple has seen that as consumers become more mature in their technology needs, more and more people turn to Apple. This is why Macs outperform the PC market. As consumers' PC needs mature, Apple is attracting more customers looking for greater value, product quality, customer service, longer life, lower total cost of ownership, and more.
Reading between the lines, it seems that Apple believes it is well-positioned when global markets recover. Apple is competing for replacement customers, not first-time smartphone owners. As customers mature and look to upgrade their Android device for the full Apple experience, Apple will be competitive. This is where continued innovation in the ecosystem and hardware, software, and services layer is crucial.
Modeling the growth of net new additions to the Apple ecosystem will be tougher than before. More importantly, predicting when macroeconomic issues resolve will be even more difficult. Even the best economists in the world are continually wrong in their predictions.
At a fundamental level, both these growth points are related. Apple is trying to be the first fully integrated hardware, software, and services player in consumer tech. From a growth standpoint, we and Apple's investors, need to figure out if we believe the services growth story and that Apple can gain meaningful share from Android.
While my main points on hardware are related to the iPhone, since that is the short-term emphasis, the rest of Apple's hardware should be viewed in this light as well. The Apple Watch $699.99 at Apple Store is not only going to become a serious revenue contributor but also a deeper lock-in and attractive to a switcher. Apple TV, Mac, iPad, and anything else becomes not just a hardware sale but a portal to a rich services ecosystem. All the pieces are there for Apple to continue to be one of the most profitable companies in the world.
Blogger Comment
Facebook Comment