Apple’s Next Big Thing: A Business Model Change
by Jean-Louis Gassée
Lacking a magical new product of iPhone proportions, the company, its focus, and its culture are bound to change.
The past three Monday Notes (here, here and here) looked at possible candidates for Apple’s NBT (Next Big Thing), a product category that could launch an iPhone-like growth wave now that the smartphone market approaches saturation. For perspective, 2021 iPhone revenue was $192B, more than half of Apple’s total revenue of $366B, this from almost nothing ($123M) in 2007. And this doesn’t count App Store revenue, mostly for iPhone apps. The numbers aren’t directly disclosed but reliable sources estimate tens of billions of dollars in net revenue, the riches Apple gets to keep after paying developers.
We’ve looked at three fields of opportunity: The unacknowledged Apple Car (the “Titan” project), Augmented Reality (AR) devices, and forays into the healthcare market, none of which is a feasible candidate. The car project looks unrealistically adventurous; AR devices, while more likely, probably wouldn’t enjoy the everywhere-all-the-time use that is the mark of smartphones; and, while the healthcare field is huge and open to more effective ways to spend our money, doing-well-while-doing-good devices, such as hearing aids, don’t offer iPhone-like potential. I hope I’m wrong on one or more of these opportunities, but I just don’t see a huge new Apple hardware growth wave in our future.
I was thinking about all of this while watching Tim Cook and his team of presenters introduce new Apple Watches, AirPod Pros, and improved iPhones during Apple’s latest unveiling event. “New iPhones! New Apple Watches! New AirPods!”, exclaims Greg Kumparak of TechCrunch. I assume Mr. Kumparak’s breathlessness is somewhat facetious. There was an interesting Satellite Communication feature, currently for emergency use only, but otherwise I had a hard time summoning his level of excitement.
Certainly, Apple continues to move its products forward, but with little hope for another breakthrough of iPhone proportions. One can’t call Apple hopeless — too many critics have had to eat their “Apple is Doomed” proclamations — but without a Next Big Thing in its future, Apple could be viewed as living in incremental mode. Perhaps it has reached a stage where it will survive — and no doubt thrive — by simply improving existing devices, relying on its tentacular array of services to bring in new customers and fortify the loyalty of its faithful.
This led me to reconsider my interpretation of Apple’s business model and the way the company thinks of itself.
In a 2021 MN, I criticized Apple management for making vague identity statements. I thought that the “Enriching Lives” credo, while mellifluent, could mean anything and thus fails to be a cynosure, a North Star for company employees.
I suggested a simpler, sharper statement: Apple makes personal computers, small, medium, and large. Everything else Apple does has but one raison d’être: They push up the volumes and margins of the company’s main hardware products. For example, App Stores exist to make Watches and iPhones and Mac Pros more useful, more pleasant, thus improving revenue and profit. (I also looked at Microsoft’s statement of purpose, “Our mission is to empower every person and every organization on the planet to achieve more,” and offered a sharper redefinition: “We create business software for individuals and organizations.”)
It’s only a year later, but I’m already changing my tune. Instead of a model that casts personal computers as the star with everything else relegated to a supporting role, I see Apple’s money pump running on a virtuous circle of Devices and Services that work together to, ahem, enrich people’s lives.
In this model, Apple’s most fruitful growth will come from an ever-expanding array of Services: banking, more sports streaming, and, yes, advertising, pegged at only $4B in 2021 but supposed to grow to $10B or more in the next couple of years, and more.
(“Ads?” you may rightly ask, “What about the iAds failure? Apple’s walled garden is a non-starter for ads.” Yes, iAds was a failure, but that was more than a decade ago when Steve Jobs hoped to reach 50% of the mobile ad market. The company has changed since then. By promoting its privacy protection and anti-tracking features, Apple has made serious inroads into an advertising market that has been dominated by social networking sites, so much so that Zuckerberg and others complain that Apple is hurting their bottom line. If Apple continues to grow its ad business, accusation of hypocrisy will certainly follow. Food for a future Monday Note.)
Apple has long recognized that Services has serious revenue potential. In the call that traditionally follows Apple’s quarterly earnings release, Tim Cook and CFO Luca Maestri have repeatedly emphasized that the Services business is both a stabilizer and a growth engine, reaching almost 20% of total revenue in the company’s most recent quarter (ending June 2022), with margins in the 60% range.
My feeling is that Cook and his team are way ahead of us — or me, anyway. They’ve known for a while that Apple has entered a different era. With no Next Big Thing on the horizon — with Devices in a safe-but-slow incremental upward incline — the company has been compelled to move into conquest mode with its Services. This forced change in priorities has consequences, the compass needle points in a different direction. The reward system, people hired, career opportunities, “How We Do Things Here” culture…everything changes.
As an example, the introduction of an “Apple Bank” or an “Apple Search Engine” could yield the company more glory — and profit — than would a new-and-improved iDevice running on the latest, fastest, coolest Apple Silicon chip. Yes, a better iPhone would be cool, but the market is cooling…
It pains this aging geek to think such thoughts, but I can’t help but assume that Apple will evolve into a different sort of company. Nonetheless, I still want to see an Apple Car and see the company’s still working on that bet as a potential head against incrementalism.
jlg@gassee.com or @gassee
