Wiser! #66 (Premium): What's next for Apple? They were the first corporation in history to hit a $3 trillion market cap. Can they be the first to earn $1 trillion in sales? What's coming next will define Tim Cook's legacy. Find out more in this Wiser! Insights.
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Apple: at the Intersection of Hardware, Software and Services
BackStory: Tim Cook’s mantra is to put Apple at “the intersection of hardware, software, and services.” He said it not once, but twice on the company’s last earnings call, a sure sign that it's a statement that means something. It's a unique glue that holds Apple and its customers together. There is nothing else like it.
But then again, Apple is unlike any other company in the tech economy. The first corporate to cross the $3 trillion market cap border, and most likely to be the first corporation to book $1 trillion a year in annual sales.
At the heart of Apple's proposition is the iPhone, the most successful consumer product in history. It's a luxury item in the hands of over a billion people that signals status and wealth (think Ferrari) whilst repeatably sold on a global scale (think Toyota).
Apple shipped 236 million iPhones and 58 million iPads in 2021. If you piled all of these devices on top of each other, they would stand around 1,400 miles high, which is over 250 times the height of Mount Everest.
Not bad for a device that only just turned 15 a few weeks ago. When Steve Jobs first announced the iPhone in 2007, he called it "a touchscreen iPod, a phone and an internet communicator”. Now, iPhone is so much more, containing speakers and microphones, a barometer, an accelerometer, a proximity sensor, an ambient light sensor, a gyroscope, and four cameras.
Nowadays, it's a voice-activated, lifestyle command centre as well as being (still) a phone. The iPhone and its iOS operating system seamlessly connect a personal network of internet devices. From an Apple TV in the living room to HomePods in the kitchen. It'll tell you where you left your keys via AirTags, stream music to your ears via AirPods and can an ambulance if you fall over in the forest, via an Apple Watch. With more to come; augmented reality glasses, Apple Car and, next, a virtual reality headset
No other tech company has anything like it.
Transitioning from Hardware to Services
Transition: The origins of the "hardware, software, services" strategy can be traced back to 2017 and the launch of the iPhone X. This marked the beginning of a transition from hardware being Apple's primary sales engine. From a business model of transactions to recurring monthly subscriptions.
Apple launched the iPhone X with a $1,000 starting price. At the time, this was a leap for Apple customers who had been used to paying a few hundred dollars less for earlier versions of the iPhone.
It also changed the buying dynamic. As owners kept their iPhones for longer periods of time between replacing/upgrading them. Up until this point, Apple's sales strategy had been to entice customers to want the very latest model. But that meant each new iPhone iteration had to be much better than the last one, to keep the demand curve high. It meant a never-ending demand for even more new features and functions.
By uplifting the price point for the iPhone, they consequence would be fewer models sold, although each carried a substantially higher margin (around 60%).
To compensate for the potential for lower topline sales as consumers kept their iPhones for longer, Apple begin a strategy to expand into Services. The goal was to develop a recurring revenue stream to more than replace the transaction-based reliance on a hardware strategy.
Apple's Strategy Worked
Success: In 2017, the year the iPhone X launched, Apple reported $32 billion in Services sales (which was around 13% of revenue). By 2021, Services revenues had more than doubled to over $68 billion (now accounting for almost $1 in every $5 that Apple earns).
The key to Apple's growth in Services has been the focus on "recurring revenues", aka, monthly subscriptions. From 2017 onwards, Apple’s Services business has created new Apple offerings to generate consistent month on month sales income.
The point is that in the hardware model, sales are transactional and seasonal. Sales peak at Christmas or when a new model is launched, and dip in January or just before a new release. Whereas subscription services generate steady, reliable and consistent incomes, all of the time.
They also mean that new products and offerings can be upsold with minimal sales effort. For an extra $1 a month you now get the Apple XYZ. With over a billion iPhone users...you can do the maths!
Amongst the new services offerings were credit cards, games and a news service. Apple TV+ came along and Apple Music quickly became the replacement for iTunes. The cross device integration with iCloud subscriptions remained a money earner as most Apple users upgraded from the free 5GB plan at a marginal cost that was primarily all profit.
Then Came Apple One
Bundled: In 2020, Apple launched the subscription bundle as a way to get Apple users to subscribe to even more services. Combining Apple Music, Apple TV+, Apple Arcade, Apple News+, Apple Fitness+, and iCloud storage into 2 levels of monthly subscription.
The point? Services are extremely high margin for Apple. The incremental cost of adding additional services into a user's subscription is negligible. The extra dollar or 2 in revenue flows straight to the bottom line.
Better still, there's plenty of room for more growth, creating the ultimate subscription product. Imagine paying one monthly fee to combine all of the Services in the Apple One subscription with the iPhone upgrade programme so that you were automatically sent a new iPhone every 12 months or so.
And it wouldn't need to stop there. With all the new products and Services that are anticipated, it is not beyond the realms of possibility that Apple becomes the ultimate lifestyle subscription. For, say, $1,999 a month you could get your car, phone, tablet, laptop, TV and music, health monitoring and even banking services. All courtesy of Apple wrapped up in the brand values of TRUST, PRIVACY, QUALITY and STATUS.
But that doesn't mean the end of the road for Hardware. Far from it.
Verticalisation of Apple's Supply Chain
TurningPoint: 2021 was a quiet year for new Apple products, with the exception of the impressive Macbook Pro.
However in 2022 that is expected to change with a slew of new Hardware products and upgrades, including the Apple Watch Series 8, iPhone 14, a new iPad Pro with wireless charging, and the biggest MacBook Air redesign in the product’s history. But the centrepiece is rumoured to be the Mac, its longest-serving product.
From 2011 to 2020, the Mac consistently generated between $21 and $28 billion in sales per year, every year. However, in 2021, the Mac had its best year ever and booked a cool $35 billion in topline sales, even more than the iPad!
A critical success factor in Apple's computer business has been the complete overhaul of its manufacturing supply chain. It started in 2020 with the replacement of Intel chips in favour of Apple's own Silicon chips. The first Apple chip is called the M1 (which is in the Macbook Air I'm using right now). A new M2 chip is expected this year as well as Super-powered versions of the M1 Max.
The takeaway is that Apple has verticalised computer manufacturing and removed a critical reliance on Intel, the world's largest chip manufacturer.
The Route to Becoming a $1 Trillion Corporation
OneTrillion: It's hard to think of any other company that would beat Apple to be the world's 1st trillion-dollar company. If Tim Cook maintains Apple’s current and historic rate of growth of 7%-8% per annum, then the company will be generating around $650 billion in revenue by 2030. And this is before you take account of the revenue potential in brand new markets for Apple.
What's Next?: Into the Metaverse
Tim Cook has said that he sees the future as an augmented one, not a virtual one. As far back as 2016, Tim Cook has been saying that he sees AR as being bigger and more important technology than VR.
However, Apple will go first with a VR headset that is being described as Mixed Reality because it will also have AR features. The headset is codenamed N301 and has an accompanying rOS, codenamed Oak. The timeline for the product has slipped from the original target of 2020 and even 2023 is in doubt.
Reports of technical issues have dogged its development, but since this will be Apple's first major new product since the 2015 launch of the Apple Watch, it's no surprise they won't rush into releasing it (especially given the heightened attention on the Metaverse).
For me, a more interesting development will be Apple's AR glasses that will work in sync with iPhone, iPad and Watch. Apple has already said that they won't follow MetaFacebook and put a camera on the front of the glasses.
What's Next?: Cashless Payments
Apple has the means, the wherewithal and the brand to disintermediate in the consumer payment space. You only have to look at China and the impact of BigTech giants Alipay and WeChat. These SuperApps enabled consumers to replace physical cash with a mobile app and create a cashless society. That could be Apple in the USA.
Apple Pay is already accepted by over 90% of US retailers and now Apple has announced Tap to Pay. This is a new feature using NFC technology that turns an iPhone into a credit card reader. Consumers can use an iPhone, Apple Watch, digital wallet or contactless credit card to make a payment.
It's possible because, in 2020, Apple acquired a startup called Mobeewave for $100 million. Mobeewave developed technology that lets smartphones process payments with the tap of a credit card.
This is going to be bad news for the existing payment providers like Square, who have been installing specialists equipment in stores since 2009. Apple has just made all of that specialist equipment redundant. And for Apple it will be as simple as rolling out the feature in the next iOS update and, bingo, a billion iPhones turn into credit card machines.
What's Next?: Replace Google with Apple Search
Search is the most powerful way to advertise in history. Google dominate the space and made $149 billion last year by selling ads next to search results. That's more money than all the TV, radio, and print businesses in the world put together.
Apple is believed to be paid an estimated $15 billion a year from Google to be the default search engine on the iPhone. That's how much it is worth to Google to be in front of a billion (more affluent) eyeballs.
This is not unfamiliar ground for Apple, who already combine ads with search results in the App Store. Replacing Google with their own Search engine is an obvious next move given that Apple have made privacy a strategic differentiator.
Keeping Search data within the iCloud ecosystem makes both strategic and branding sense. It would enhance the value of Apple's subscription services for a loyal customer base who already trust Apple with their most important data (passwords, credit cards, health).
Remember; Apple's overarching strategy is to go vertical. Just as Apple replaced Intel with their own in-house designed and built computer chips, they could do the same to Google.
What's Next?: Health
For Health read Wearables, in particular, the Apple Watch. The Series 7 will make an emergency call if you're knocked unconscious in a forest, will monitor your blood pressure and blood oxygen levels, and even let you take an ECG anytime, anywhere.
On their last earnings call, Tim Cook said, “we’re still in the early innings with our health work." In other words, there's more to come!
The next-generation AirPods are likely to double up as hearing aids. Whilst the augmented reality capability in Apple Glasses could enhance eyesight. Combine all of this with Apple Search wrapped in a Tim Cook privacy blanket and users could be asking Siri to answer their health questions.
Instead of going to your doctor's surgery, you talk to your Apple Watch. (I'm speculating, but it's doable.)
What's Next?: Apple Car
Thanks to Tesla, the auto sector has been transformed from a low margin manufacturing industry into a software one. The appeal for Apple is Attention. We spend a lot of time in our cars. We're a captive audience for Apple's Subscription Services.
The Apple Car would be the ultimate example of integrated Hardware, Software and Services. And it's coming; the Apple self-driving electric vehicle. Exactly when and how much and what it will look like are all unanswered questions. There's a lot of speculation but little substance. From what I can see, 2024/2025 is the current bet for the launch of Apple's entry into the auto space.
Based on patent filings, rumours, and a lot of market speculation, the general look of the car could be different from how cars are made now, based on sleek lines and Apple's ability to design awesome looking products. Also expected are features like wide-swinging doors that don't need a permanent centre door pillar, which makes the doors even bigger. And the use of AR and VR technology as well as in-screen displays and privacy lighting. Unique sunroof designs are also mentioned.
One thing is for certain, when the day comes, the Apple Car offers the potential to be as game-changing for Apple as the iPhone was in 2007. 🚗 Watch this space.
Let us know what you think about this subject by putting your comments, thoughts or feedback in the comment section below. ☟
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w/Sources of Insight and Information
Apple: Thief. Source: No Mercy / No Malice
What's Apple Releasing in 2022? iPhone 14, AirPods Pro 2, iMac Pro, iPads. Source: Bloomberg
Bernstein says Google's FY21 payments to Apple might reach nearly $15B. Source: Philip Elmer DeWitt
Apple Studying Potential of AirPods as Health Device. Source: WSJ
Apple’s C.E.O. Is Making Very Different Choices From Mark Zuckerberg. Source: The New York Times
Apple Buys Mobeewave For $100M. Source: PYMNTS.com
Apple sacrificing iPhone 13 profits to improve performance, report finds. Source: iMore
Apple to Let iPhones Accept Credit Cards in Threat to Square. Source: Bloomberg
Apple says there are now over 1 billion active iPhones. Source: The Verge
Apple Car | Release Dates, Features, Specs, Rumors. Source: Apple Insider
RIP, iTunes. This is what happens to your Apple music now. Source: CNET
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