Apple Business Model: A Naive Nostalgic Look

Jean-Louis Gassée
Monday Note
Published in
5 min readJul 25, 2021

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by Jean-Louis Gassée

In recent years, Apple has put great and generally well received emphasis on its Services business. Does this come at a cost to the device-oriented culture that made it a success?

Once upon a time, Apple offered an easy-to-understand business model. The company made personal computers, small, medium, and large. Successfully positioned in the affordable luxury market sector, Apple devices sold well with healthy margins. Those margins helped finance strong R&D investments and took good care of employees, investors, and Uncle Sam.

All of Apple’s other services and accessories had but one raison d’être: raise the sales volumes and margins of the company’s personal computers.

As an example perhaps lost in the mist of time, Apple used to sell OS X updates, there was the single user version and, if memory serves, a “family” DVD for five users. I must have been logged onto the useful idiot database because I dutifully bought the family DVD and only belatedly realized that the single user version wasn’t locked — it could be applied to as many machines as needed… One day, OS X updates became as they are today: free. The raison d’être of these updates wasn’t to make money in and of themselves, but to help boost Mac sales by making owning an Apple personal computer more attractive.

This simple — simplistic even — model was bound to break down, to become more complicated. The iPhone caused a substantial change, not in itself but because it caused the birth of the App Store.

For context, we need to go back to the iPod and the iTunes store. The magical iPod deserves more appreciation for its role in Apple’s subsequent fortunes. Its amazing success burnished Apple’s image at a time when there were questions about the Mac’s future. In Fiscal Year 2006, the year before the iPhone, iPod sales exceeded Mac revenue $7.7B to $7.4B. Before it became the iPhone company, Apple was all about the iPod.

Behind the scenes, the iPod blazed the trail for the iPhone. Culturally, it created a taste for miniaturized devices; technically, it drove the Supply Chain Management discipline and connections that would become essential for the success of the iPhone.

But there was more. Another iPod-related feature was the iTunes Store. By dint of his chutzpah, Steve Jobs convinced music companies to let him/Apple sell music “by the slice”, and persuaded credit card companies to, in effect, allow micropayments.

Then the iPhone happened and Apple insiders had an almost religious epiphany: iPhone apps are digital files, not unlike a song in the iTunes Store. Somehow, everything had been preordained to work for an Apple store: The infrastructure, the payment system and, just as important, customer behavior. The iTunes Store begat the iPhone App Store.

At first, the App Store looked like another product in charge of propping up sales volume and profit margin for the main act, the iPhone. That didn’t last. The App Store became more than an iPhone support function, it became a gigantic business in itself. One that Apple doesn’t disclose but bundles into the Services category. The Services number includes much more than the undisclosed App Store revenue, it encompasses services such as iCloud and Music revenue, Apple Care, and the more visible Apple TV activities.

In the company’s latest SEC filing for the quarter ended in March 2021, Apple’s Services reached $16.9B, exactly as much as the $16.9B number for the combined Mac and iPad revenue, although still far from the $48B iPhone revenue for that quarter.

This changes the business model’s “center of gravity”.

What becomes interesting is how Apple leaders jumped on the App Store explosion to shift the company’s finances away from the old hardware-centric design that Wall Street didn’t like. The iPhone’s phenomenal success created a problem by weighing too much in Apple’s books: too seasonal, too risky because a so-so or worse model would have too much of a negative impact. Adding all sorts of services to the exploding App Store created the perception of recurring, sticky, less-seasonal revenue that would buffer Apple’s financials against iPhone uncertainties. So, that’s how we have Hollywood deals, Ted Lasso successes and others, Fitness exercises, games, Cloud services and more. Some think Services might reach $100B or more by 2023 or sooner. Besides please Wall Street, a pleasure translated in a higher stock price, this reinforces the virtuous (some people have another adjective) circle that is a mark of Apple’s business model: attractive services make Apple hardware devices more useful/pleasurable, selling more units that, in turn create more services users and use. Perfect: a buffer against hardware seasonality and comfortable environment that tends to keep users tied to products and services, the famed Apple Walled Garden.

This raises questions. What happens to priorities, to company culture? What will be sacrificed and what will be preserved? For example, if budgetary restrictions are needed, what will be prioritized: the next Ted Lasso or the next Apple Silicon processor? Crises always happen and almost always come out of nowhere, a big intellectual property lawsuit, a mediocre iPhone, a big Augmented Reality flop, a stillborn Apple Car… In reality, a crisis tends to be something no one could have imagined, otherwise it would have been handled preventively.

As a perennial Apple fan who is delighted with developments such as Apple Silicon and who hopes for more Watch health applications such as blood pressure and blood glucose measurements, I don’t have immediate worries for Apple’s culture. But I’m old enough to have seen strong companies lose their way as their priorities changed and they lost sight of their strengths. My old HP comes to mind. After it had won both the desktop and portable computer markets, it chased other targets and thus missed the opportunity to be a player in the PC and pocket machine revolutions.

As many have remarked, history doesn’t repeat itself, it stutters. HP’s mistakes aren’t a model for Apple’s possible missteps. But one can look at the company’s weak Cloud story or the missed Siri opportunity to see areas where mistakes were made, examples merely chosen to remind ourselves that successful companies do blunder. Look no further than Microsoft, which missed the mobile phone market and is still trying to get in with a misbegotten device, the Surface Duo, now in retailers’ bargain bin.

I naively hope Apple won’t lose its device-centered culture, where the sharpest tech candidates still dream of working on the next iOS version or the next Apple Silicon processor, as opposed to working on Hollywood deals.

— JLG@mondaynote.com

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