Apple continues its transition from products to services

Quarterly revenues for gadget giant Apple were up year-on-year but down for the full year, as the company increasingly relies on services.

The headline of Apple’s latest quarterly announcement read: ‘Services Revenue Reaches All-Time High of $12.5 Billion’. This achievement masked the fact iPhone revenues continue to decline, which in turn dragged full year revenues into the red. On the whole, however, these were solid results for Apple and it seems to be managing its strategic transition well.

“We concluded a groundbreaking fiscal 2019 with our highest Q4 revenue ever, fueled by accelerating growth from Services, Wearables and iPad,” said Tim Cook, Apple’s CEO. “With customers and reviewers raving about the new generation of iPhones, today’s debut of new, noise-cancelling AirPods Pro, the hotly-anticipated arrival of Apple TV+ just two days away, and our best lineup of products and services ever, we’re very optimistic about what the holiday quarter has in store.”

The services side of things was the focus of the tech press in its analysis. Apparently Apple pay transaction volume overtook that of PayPal in the most recent quarter. A significant initiative that illustrates the symbiosis of the services and hardware side is Apple’s decision to offer interest-free financing of new iPhones through its own credit card. This will also be a significant blow for the postpaid phone contract sector as subscribers will no longer be dependent on operators for handset financing.

The fact that iPhone shipments are declining is not disastrous, so long as Apple maintains the massive iOS installed -base. As the Apple Pay numbers show, Apple’s services are bound to do well so long as there are lots of iPhones in use. The financing initiative implies Apple is worried about that installed-base declining, however, and may not be the last time we see Apple further incentivising people to buy iPhones.

The columns in the table below are as follows: fiscal Q4 2019, Q4 2018, full fiscal year 2019, full year 2018.

The tensions within globalisation grow ever more strained

The latest wave of controversies surrounding US companies attempting to accommodate Chinese political and cultural sensibilities reveals how precarious the globalised economy is.

Yesterday we reported on the contortions Apple has subjected itself to as it tries to balance western free market principles with the apparent needs of the Chinese state. This perceived kowtowing generated considerable backlash, such that Apple CEO Tim Cook felt compelled to explain the corporate position to his employees in an internal email. The email leaked and even commentators normally favourably disposed towards Apple are unconvinced by Cook’s reasons for banning a Hong Kong mapping app.

This is just the latest example of US internet giants being put in a difficult position because their globalised nature means they have to find a way to do business in countries with a wide variety of politics and cultures. They all claim to be politically agnostic, but when their decisions are suspected of being influenced by political considerations, that claim is fundamentally undermined.

Google got in trouble with its own employees when they learned it was developing a version of its search engine that would allow the Chinese state to censor results, while both Facebook and Twitter were recently criticised for taking town accounts linked to the Hong Kong protests. China accounts for such a disproportionate amount of this intrigue because it is not only a notorious state censor, but is also the main focus of US geopolitical anxiety.

While global power dynamics probably form the principle objection to doing business with China from the ‘conservative’ side of the fence, cultural considerations seem to most concern the ‘liberals’. High profile human rights crises such as the Hong Kong protests and the persecution of China’s Uighur population have introduced a moral dimension to doing business with China that Silicon Valley companies are finding very difficult to reconcile.

The Uighur situation was even used by President Trump to justify the addition of several more companies to the US entity list of companies it wants to freeze out of the global marketplace recently. It’s widely assumed these kinds of sanctions, which include the actions being taken against Huawei, are more about the US trying to constrain China in general. But being able to claim a moral justification for pragmatic actions is an undeniably useful tool in the court of public opinion.

The flip side is that when a US company is suspected of seeking to accommodate Chinese political and cultural sensitivities, that takes on a moral dimension too and the company is seen as complicit in human rights abuses. Hence the likes of Blizzard and the NBA are currently under pressure to explain why they have acted to censor statements of solidarity with the Hong Kong protesters.

The globalised economy, coupled with the elimination of borders and distance provided by the internet, means these kinds of business dilemmas are bound to increase. These days many people expect companies to be moral as well as commercial entities and are prepared to vote with their wallets whenever they think they have fallen short.

In many ways this is an unfair burden to place on companies. Doing business should, in principle, be an amoral act born solely of supply, demand and mutual benefit. But they have brought this on themselves by introducing a growing moral element to their corporate branding as they seek to placate ‘woke’ consumers, and even have the temerity to suggest that buying their products is a moral choice in itself.

Entrenched moral positions often founder when faced with difficult questions for which there are no obvious ‘right’ answers. On one hand US companies have a fiduciary obligation to their shareholders to do business wherever there’s business to be done. On the other they increasingly have an obligation to their customers, employees and home countries to do the ‘right’ thing. As the geopolitical battle of wills between the US and China escalates it’s growing increasingly difficult to do both, and Western companies have some tough choices ahead of them.

Apple U-turns again to pull HK map app under pressure from Beijing

Apple has removed the crowd-sourced app HKmap.live, favoured by the protesters in Hong Kong, from its local App Store, after being blasted by China’s state media.

The submission of the mapping app, developed on top of the web version which could enable users to instantly track the police movements, among other things on the roads, was first rejected by Apple, on the ground that “the app allowed users to evade law enforcement.” This caused strong protest from both local users in Hong Kong and politicians in the US so Apple reversed its decision and made the app available. The US Senator Josh Hawley (R-MO) told his followers on Twitter that Apple admitted it “mistakenly” failed to go through full review process the first time:

Shortly after the change of mind by Apple, the People’s Daily, one of the Chinese Communist Party’s major propaganda outlets, accused Apple of “helping HK rioters engage in more violence”. Apple quickly undertook a second reversal in days to take down the app. The company said in a statement on the decision that the app “has been used in ways that endanger law enforcement and residents in Hong Kong.” The web version is still available.

This is only one of the latest actions Apple has taken after finding itself caught in a perfect political storm. One day earlier it also removed Quartz, the online news publication, from the China App Store, following complaints from the Chinese government. Apple told Quartz that the app “includes content that is illegal in China”, reported The Verge.

Quartz believed this might refer to its discussion on VPN technologies, the use of which is illegal in China, and its coverage of and links to coverage of the ongoing protest in Hong Kong. Quartz’s website is also blocked by China’s Great Firewall. A week earlier when Apple updated its operating system, iPhone users who set their locale to  Hong Kong and Macau found the Taiwan flag had disappeared from emojis.

This is just one of the highest profile cases of global companies contorting themselves to appease local political interests, with China the centre of attention not the least because of its reputation as one of the most censorious countries, Apple vs. China only epitomises the delicate balance almost all global companies are forced to strike, and not always successfully. Whenever they enter markets that operate very differently to their domestic one, these companies, especially those from North America and Western Europe, have to make a choice between the values of their origin and market pressure.

Increasingly we have seen companies surrender to market pressure, which has led to more either remedial or even pre-emptive self-censorship. Such conflict has a long history in the digital age. Back in 2010, Google pulled out of China when it decided to no longer comply with the latter’s demand for censoring search results. In the same year, India, Indonesia, UAE, Saudi Arabia, among others, demanded access to the encrypted communication carried out by the then king of instant messaging, BlackBerry Messenger, for national security and data localisation purposes. RIM, the then owner of BlackBerry, bowed to the Saudi pressure, and Nokia, who also operated messaging services, decided to set up a local data centre in India.

Recently we have seen Google’s repeated attempts to re-enter China, by offering willingly to censor content to please the Chinese authorities, despite backlashes in its own office. Meanwhile games developer Blizzard had faced a backlash for acting against a Hong Kong protester, as has the US NBA for similar activity.

Apple rejects crowdsourced map app used by Hong Kong protesters

HKmap.live is a crowdsourced web app that shows the location of Hong Kong protests and police activity. Apple has rejected the app version of it.

This is the feedback the developers got from Apple, which they shared in a tweet. “Your app contains content – or facilitates, enables, and encourages an activity – that is not legal … Specifically, the app allowed users to evade law enforcement.” The tweet goes on to object to the assumption that the app is used to break the law, but Apple seems to be saying that any app used to identify the location of coppers is intrinsically illegal.

Initial reports on the matter implied Apple had banned a pre-existing app, but the developers subsequently tweeted to clarify that the app had been rejected during the review process and to say that its main frustration was the glacial progress of that process. It also noted that anything can be used for illegal purposes in the wrong hands and that the app is designed only to provide information. It has received some support for its position.

This minor controversy puts Apple in a delicate position as it raises the question of whether its decision was influenced by pressure from China. The Hong Kong protests were prompted by apparent attempts by China to exert greater direct control over the semi-autonomous region and have become a significant embarrassment to the Chinese government. If it continues to the block the app, Apple will be under increasing pressure to demonstrate it’s not doing so for political reasons.

iPhone gets the official nod of approval for tariff exemptions

For those who are facing uncertainty over the potential introduction of tariffs on products and components originating in China, the confirmation of Apple’s exemptions will perhaps rub salt into the wound.

Although the idea of preferential treatment is a stretch, a lot of good things do happen to Apple. With new tariffs looming on the horizon, Apple has received approval for 10 of the 15 applications it made for exemption. Details are thin on the ground for the moment (the US Trade Representative website had crashed at the time of writing), the damage which would be inflicted on the iLeader’s Mac Pro computers.

Dedicated Apple followers will now breath a sigh of relief as the prospect of increased costs being passed onto the consumer are much lower. Apple will have to swallow some additional costs, not every application was approved, but the impact will now be limited.

The Apple issue is a relatively complicated one. Although the Mac Pro products are assembled in the US, many of the components are manufactured in China. For example, partially completed circuit boards are imported to a plant in Texas for the final product to be assembled.

Texas does appear to be an interesting element in this story…

On July 26, President Trump tweeted “Apple will not be given Tariff waiver, or relief, for Mac Pro parts that are made in China. Make them in the USA, no Tariffs!”, before going onto explain the next day that Apple was considering opening a manufacturing plant in Texas as a means to avoid the financial penalty. The claims followed meetings between the President and Apple CEO Tim Cook, but Apple is yet to make any announcement which would resemble what Trump is claiming.

In fact, during the last earnings call, Cook suggested the tariffs presenting a significant problem for Apple. The current set-up was not necessarily feasible, with some fearing these comments meant production could be moved out of the US completely.

Much of Apple’s manufacturing supply chain is currently located in China. One reason for this will be the cost of labour, land and local materials, but it is worth noting that China has skillset which cannot be replicated in the US. China is a hotbed for the worldwide manufacturing industry, and such, careers like Precision Tooling have thrived while they have suffered elsewhere. Sourcing talent outside of China is as much of a supply chain headache as swallowing the cost is.

While an unknown number of companies will be sweating over the seesawing nature of the US/China trade relationship and potential tariffs, Apple seems to be coming out unscathed at each turn in the road. With these exemptions, and the delay of the tariffs which would have impacted the production of the iPhone, the Apple lobby seems to be working very effectively.

Apple and Ireland begin appealing €14.3bn tax bill

Lawyers representing Apple and the Irish Government has begun their arguments in the EU’s lower General Court in an attempt to protect the suspect corporate tax environment.

In 2016, the European Commission ordered the Irish Government to collect back-taxes off Apple to the tune of €14.3 billion, including interest. Apple does not want to pay tax. Ireland does not want to collect it. Europe wants a level playing field. The lawyers are looking forward to nuance to bolster their bank accounts.

During the opening arguments, Apple’s lawyers suggested the European Commission decision “defies reality and common sense,” according to Reuters. Both the iPhone manufacturer and the Irish Government will argue against the decision to tax environment contravenes state aid rules.

Let’s be clear. Ireland is a tax haven. It is facilitating corporate tax avoidance. It is helping corporates collect greater profits without rewarding the societies they strain. Irish Government officials should be embarrassed they are helping technology giants abuse its European partners, the very same European partners which bailed it out of financial doomsday a decade ago.

This is a selfish position, and just at the time when the country is looking to Europe to protect it as Brexit looms large on the horizon.

Some might argue the Irish Government is entitled to charge whatever tax it wants. However, a modern society works because the general public and corporations pay taxes. It pays for roads, schools, hospitals, police officers and postal workers. There are technology giants out there who are asking consumers to strain their wallets further each year and care less about their right to privacy, but they are not willing to contribute to the societies which are fuelling the monstrous profits reported every three months.

With international borders being broken down, much to the distaste of some, irregular taxation policies can be taken advantage of. This is what is happening here. It beggars belief that Ireland can argue the benefits of the single economy, and still maintain this position, weakening the position of partners, depriving them of much needed taxes.

This is not the position the European Commission has taken, but it is the one each of Ireland’s partners in Europe should. Why should Ireland be able to collect all the benefits of Apple’s assaults on the European digital economy when it is citizens of every other nation which is fuelling the iLeader’s growth?

For some, it might sound bizarre that the Irish Government doesn’t want to collect €14.3 billion off Apple, but there are two reasons for this.

Firstly, if the Irish lawyers were not to fight back against the enforced tax run, it is effectively conceded to the assertion that it is a corporate tax haven. The last thing the Irish Government wants to do is admit that it is helping the already richly rewarded residents of Silicon Valley rip-off neighbouring governments further with creative tax strategies.

Secondly, Ireland needs to ensure it is viewed as a friendly corporate-tax environment moving forward if it is to continue to attract corporations to its borders. Ireland doesn’t necessarily have the best talent, it doesn’t have the largest economy and it doesn’t have a local supply chain for manufacturing. It needs a plug to interest the likes of Apple, Facebook, IBM, Intel, Twitter, Pinterest, PayPal and Amazon to house their European HQ in the country.

The value of the technology industry to both the Irish Government and society should not be undervalued. The Irish economy entered severe recession in 2008, and then an economic depression in 2009. The country was in tatters, though it was saved by the technology industry.

Over the last decade, technology giants thrived in the tax haven, creating new jobs directly and indirectly, and continues to be one of the biggest drivers today. Silicon Docks is as important to Dublin as Silicon Valley is to California.

That said, the European Commission does not agree this dynamic should be allowed to continue.

Should the Irish Government continue this favourable tax regime for certain companies, a competitive advantage is offered. The Commission, ably led by Margrethe Vestager, has been tackling anti-competitive business practises for years. If such a monstrous company like Apple is given a competitive advantage, state aid to run riot, start-ups will always be on the back-foot. Competition will likely never emerge, and the consumer will be in a precarious position.

Over the next couple of days, lawyers representing Apple and the Irish Government will argue against the opinion of the European Commission, attempting to overturn an order to collect back-taxes and create a more reasonable tax environment. It will argue that it is perfectly reasonable for it to help Apple bleed the consumer dry and then hide profits from governments who are asking for a fair contribution back to society to pay nurses.

Ireland should be embarrassed.

Apple and Disney belatedly sever corporate ties

Disney CEO Bob Iger has been on the Apple board for eight years but, with the two companies now competing directly in the SVOD market, he has resigned.

Last week Apple officially launched its Apple TV+ subscription video on demand service last week, thus placing it in direct competition with Disney, which is also set to get into the SVOD game with, you guessed it, Disney+. For some reason the two companies left it until the very last minute for Iger to clear off, despite the two competing service having been in development for months.

“On September 10, 2019, Bob Iger resigned from the Board of Directors of Apple Inc,” said the abrupt, unsentimental Apple SEC filing. The Hollywood Reporter got a bit more comment on the matter, with Iger saying how great Apple is and Apple returning the compliment, which is nice. Whether relations will remain so cordial when they’re trying to steal SVOD market share from each other remains to be seen. For some reason Iger is still isted as a board member on the Apple site.

While Iger has been on the Apple board, links between the two companies go a lot further back than that. Apple founder Steve jobs was also the founder of Pixar Animation and thus become one of the largest Disney shareholder when it bought Pixar in 2006. Jobs also joined the Disney board at that time and stayed until his death in 2011.

As companies Apple and Disney have a lot in common. They both position themselves as premium consumer brands and invest heavily in their brand image. They also have a reputation for wanting to control everything around their product offering and image, so it’s not at all surprising that they would want to have their own SVOD services offering only their own stuff rather than rely on third parties for distribution or content.

One other big thing they have in common is a desire to be viewed as wholesome, family companies, which creates the possibility that they will end up producing fairly similar content. Right now Disney is mainly about feature-length movies while Apple seems to be focusing more in TV-style stuff. But that distinction could easily change over the years and, if it does, these two American icons will be fighting for the same wholesome dollar.

US lawmakers want to look at private emails from tech execs

Scrutiny of the US tech giants has been taken up another level after members of the US House Judiciary Committee have demanded they expose their internal workings.

The move has been widely reported in the US, including by the Washington Post. It seems there is already a congressional antitrust investigation underway into Amazon, Apple, Facebook and Google, which is presumably related to the actions taken against Google and Facebook earlier this week. They want to know whether the companies have abused their dominant positions to corrupt markets for digital products and services in their favour.

One of the fun things about getting legislators and lawyers involved in scrutinizing the activities of companies is that they have the power to demand access to a bunch of information that would normally be kept locked in a dark cellar, to which only the CEO has a key. The stuff this committee would like financial data about includes their products and services, and private discussions about potential merger targets, we’re told.

Having said that the letters sent apparently don’t have any legal weight behind them right now, so the companies could theoretically refuse. This is a dangerous game to play, however, as they would have to refuse in a way that didn’t imply they had something to hide. Perhaps they could just chuck over some light-hearted Friday afternoon email banter while whistling nonchalantly.

What seems unavoidable is that the state machinery in the US and elsewhere has the tech giants in its sights and seems to have decided the lot of them have far too much power by half. Since they are undeniably dominant their execs and legal departments would be well advised to buckle in for the long haul. They could also do worse than speak to grizzled campaigners from companies like Microsoft and Intel to get some top tips.