Apple finally gets the memo on sacrificing margin for market share

By making its entry-level new phone cheaper than last year’s one and only charging a fiver for its new video service, Apple is further compromising its premium image.

The roman numerals experiment is over, which means no more X in the iPhone nomenclature. Now we have the entry-level iPhone 11, the iPhone 11 Pro that has additional wide-angle and telephoto cameras on top of the regular one, and the iPhone 11 Pro Max, which is the same as the Pro but bigger. The most significant change, however, is the pricing of the 11, which is $50 less than the XR was last year at $699, which is also $100 less than the Google Pixel 3. The price of the other two phone remains the same.

On top of that the pricing of the new Apple TV+ SVOD service, which will launch on 1 November, has been announced at $5 per month, a lot cheaper than the standard Netflix package that costs $13 per month. The latter is a sensible acknowledgement that Apple TV+, which will only have original content, won’t have a fraction of the amount of stuff you can get from Netflix, while the phone pricing must surely be in response to increasing competitive pressure from the sub-premium market.

“With the tight integration between hardware, software and services, the advancements in iPhone 11 bring an unparalleled user experience at an affordable price to even more customers,” said Apple marketing boss Phil Schiller. “Apple TV+ is an unprecedented global video service with an all-original slate,” said Jamie Erlicht, Apple’s head of Worldwide Video. “We look forward to giving audiences everywhere the opportunity to enjoy these compelling stories within a rich, personalised experience on all the screens they love.”

The pricing angle has caught the attention of the commentariat. Bloomberg notes that not only is the iPhone 11 price cut significant, but the XR has had $150 knocked off it. “We view this as an admission that Apple stretched too far with the price points at last year’s launch,” Chris Caso, an Analyst at Raymond James & Associates, is quoted as saying in the Bloomberg piece.

On top of the aggressive price point for Apple TV+, anyone who buys a new iPhone, iPad, Apple TV, Mac or iPod gets a year’s subscription for free, which is not just a great way for Apple to seed TV+ into its existing customer base, but provide a strong incentive for new sales too, so this is a smart move. Having said that it’s further evidence of Apple’s sudden willingness to sacrifice margin at the altar of market share.

We spoke to Ed Barton of analyst firm Ovum to get his take on the TV+ move. “The price point and a free year of access for new Apple device buyers are aggressive moves which will help drive early growth and usage,” said Barton. “But it’s still, by volume of content, a very limited video service with no catalogue content wholly reliant on new, untested intellectual properties.

“The strength of the Apple hardware and services ecosystem means that it practically can’t fail and a lot depends on how effectively and frequently Apple drops new shows to maintain viewers’ interest levels. Apple’s $6 billion production investment and its ability to surface and promote Apple Video content to a global audience of hundreds of millions throughout its tightly integrated hardware and software ecosystem give the service huge potential.”

On top of the phone and telly stuff Apple also unveiled the latest versions of its Watch and iPad in a mega-launch that it would previously have scattered throughout the year. Just as with the phones the new devices are largely spec upgrades, but we were reminded what a relative bargain the iPad is at just $329 (Apple is still charging $130 for a modem, for some reason, and it’s hard to see why anyone would pay that when they can just tether).

One other announcement was Apple Arcade, a gaming subscription service that Apple has been banging on about for a while. Just like TV+ it costs a fiver a month (although there’s no free subscription offer) and offers a smallish selection of exclusive games. People are less impressed with the games service though.

“It’s difficult to get excited about the games subscription, it does include some exclusive, new titles which didn’t appear particularly noteworthy from a gaming perspective,” said Barton. “Most of the games included didn’t sell well on a standalone basis so it’s difficult to see who this will appeal to. Perhaps there is a casual gamer segment which appreciates the simplicity of a subscription for a heavily curated selection of mobile games, but I won’t hold my breath.”

Since smartphone innovation has been stagnant for the best part of a decade, Apple decided to seek revenue and margin growth from flogging services to its installed base. Apple TV+ is a major step further in that direction, but the decision to be more aggressive on pricing is also a sensible strategy when it comes to expanding that installed base and thus the addressable market for its services.

Apple given golden opportunity to crack India with relaxed rules

Apple has struggled to gain any sort of traction in the Indian markets to date, but new Government rules could perhaps open the door a crack.

India is a market which represents a significant opportunity for the major players in the digital economy. It has the second-largest population globally and a smartphone penetration rate of roughly 24%, but one of the few markets worldwide where smartphone shipments are increasing quickly. Thanks to certain market disruptions, India is currently under-going its own digital revolution, with the increasingly wealthy middle-class easing into the digital euphoria Western consumers have been accustomed to as the norm.

Year Smartphone penetration1 Average income (US $)2
2018 23.9% 2,020
2017 21.9% 1,830
2016 20.4% 1,690
2015 18.6% 1,600

1Statista 2World Bank Group

The evolution of India and the surge of the digital economy in the country is moving at a dramatic pace. The opportunity for profit is monstrous, but this is a tricky market to crack.

This is the conundrum which Apple is currently facing. It currently has less than 2% of market share across the country (which isn’t increasing), and premium prices are stifling any genuine ambition to increase this.

Indian consumers are gradually spending more on devices, though by the time Apple’s prices would be deemed palatable, other brands might have already developed a strong sense of loyalty; do not underestimate the power of the Android/iOS divide.

Brand Market share
Xiaomi 31%
Samsung 26%
Vivo 6%
Oppo 6%
Realme >1%
Apple >1%

Figures curtesy of Counterpoint Research – Q2 2019 shipments

However, there is a glimmer of hope. The Indian Government has this week announced it will relax rules which dictate how foreign companies can operate in the country. Fortunately for Apple, the easement will allow it to sell directly to customers through its eCommerce channels.

In by-gone years, a foreign company had to source 30% of its production locally to create a retail presence in India. This presence includes online channels. With such reliance on China for the manufacturing elements of the supply chain, Apple has always struggled to meet these requirements. As a result, Apple’s devices have been sold through local partners, who add a premium to an already premium product; it has struggled to gain a foothold in the market.

Another element tied to this is the brand story. The Apple Store is a presence in 25 countries around the world, not only presenting a direct-selling opportunity, but a chance to offer an experience to current and potential customers. This is a fundamental building block in the Apple strategy, which is all about creating a brand and an identity to cultivate customers into the loyal iLifers you see around the world today.

Thanks to new elements being considered by the Indian Government, Apple now meets the requirements and will allegedly begin selling products through its own eCommerce channels in the coming months. These new considerations take into account more iPhones will be manufactured in India, not only for Indian consumers, but for export to Europe as well. This is massive win for Apple.

In short, there are two massive benefits for Apple. Firstly, it can own the purchasing relationship with the customer, dictating the messaging and reducing the price while maintaining profit margins. Secondly, it can begin to create the Apple experience for customers to nurture the sense of loyalty which is so critical to the Apple success over the years.

Apple is an incredibly successful smartphone manufacturer because it creates excellent devices, but the work which has been done to build loyalty with its customer base should never be underestimated.

Think back to the 90s and 00s when you saw Apple adverts on TV. None of these adverts ever really discussed products in the way you would expect but talked about the Apple experience. A huge proportion of advertising today is designed around story-telling and brand experience, but Apple was arguably one of the first to do it and remains one of the best at building this experience.

The result of these campaign was an ‘us’ and ‘them’ mentality which persists today. Whether it pins iOS versus Android, or Mac versus PC, the split is very apparent, and crossover is very rare. Not only does this segmented approach maintain loyalty for the individual products, it presents significant cross-selling opportunities. How many iPhone users have an iWatch, an iPad or a Mac also? We suspect a high percentage.

Shifting people into, and keeping them in, the Apple universe can partly be attributed back to the brand marketing campaigns, the closed ecosystem and ownership of sales channels and brand experience. And now, it presents another massive opportunity moving forward; software and services revenues.

Period Net sales Software and services revenue Percentage of total
Q3 2019 53,809 11,455 21.2
Q2 2019 58,015 11,450 19.7
Q1 2019 84,310 10,875 7.7
Q4 2018 62,900 9,981 15.8
Q3 2018 53,265 10,170 19
Q2 2018 61,137 9,850 16.1
Q1 2018 88,293 9,129 10.3

Figures taken from Apple financial reports – USD ($) in millions

Apple CEO Tim Cook has made a big deal about software and services, and he is very right. It attracts recurring revenues without the R&D and manufacturing price tag. There will of course still be R&D, but smartphones are very expensive products to produce at the level Apple customers demand.

Generating revenues through AppleCare, iTunes, Apple Music, iCloud, Apple Pay, Apple Books, Siri, maps, search or TV subscription services becomes substantially more profitable once people are bought into the ecosystem. And as you can see from the table above, it is becoming an increasingly important facet of the financial spreadsheets.

With many users persisting with the OS they have become accustomed to, if Apple wants to make India a profitable market, it will have to start embedding itself in the minds and lives of Indian consumers today.

The Indian market is one which offers great prospects and profits for those who play their hands wisely. Up to now, Apple would have been written off by many industry commentators, but will changes to the rules, the door is slightly ajar. But that is all it is right now.

Apple will have to convince smartphone users it is a better alternative than the Android ecosystem, while also justifying the premium it traditionally charges for products. This will be a very difficult battle, but Apple is in a better position today than it was yesterday.

BT streamlining continues with reported £100m Dutch infrastructure sale

UK telco group BT is reportedly flogging £100 million of infrastructure assets in The Netherlands as its new CEO strives to make it a leaner operation.

BT doesn’t seem to have said anything official yet, but the Sunday Times got the scoop regardless. Apparently this is part of an attempt to streamline the struggling Global Services business, as BT currently uses its own infrastructure, such as towers and cables, to connect its Dutch business customers.

There’s not much more to the report other than a claim that, while BT is also looking to streamline its Global Services operations in other regions, including Ireland, Spain and Latin America, it doesn’t plan to completely abandon specific countries.

The report also refers to a previous Sunday Times scoop that BT is also flogging a legal software service called Tikit. It’s reasonable to ask what the hell BT was doing in the legal software business in the first place and if this is indicative of the kind of wild tangents the Global Services business has gone off on in the past, we can expect many more such disposals.

This news comes just days after it was revealed that BT was forced to hand over a bunch of cash to Ofcom due to its historical accounting incompetence. In addition BT announced last week that it was delisting from the New York stock exchange and earlier in the month decided to flog BT Fleet Solutions. Sadly for CEO Philip Jansen, none of this tweaking seems to have won over investors, with BT’s share price down by over 30% since he took over at the start of the year.

Sky becomes first MVNO to join the UK 5G race

Sky has become the first MVNO in the UK to join the 5G race, making use of the O2 network.

While Sky Mobile is little more than an ‘also-ran’ at the moment there could be some potential for the brand to cause headaches for the established players, both MNOs and MVNOs. As the leader in the UK premium content market and a healthy broadband business, there certainly are some gains to be made in terms of convergence.

“We will be the only mobile operator to be able to combine the launch of next generation superfast 5G connectivity with Sky Mobile’s unique features including Roll, Swap and Watch,” said Sophia Ahmad, Commercial Director of Sky Mobile.

All of Sky’s current data plans come with the Roll feature, allowing any unused data to be rolled into the next month, while Swap will allow any consumer to upgrade phones without changing contract. The Huawei Mate 20 5G X and Samsung Galaxy S10 5G will be available to customers in November, the target for the 5G launch.

“The mobile network operators need to watch out as this move poses a considerable threat,” said Paolo Pescatore of PP Foresight.

“It is becoming harder for telcos to differentiate on connectivity beyond price alone. Sky armed with its innovative mobile features and breath of content is very well placed to compete head on. For now, from an overall services perspective it seems to be in pole position.”

As we have mentioned before, the success of 5G will largely be reliant on the experience offered to customers as well as the price and value-add services. Relying on O2’s network to deliver its 5G offering might prove to be a weakness for Sky as the MNO has regularly featured at the bottom of rankings when it comes to customer experience.

Interestingly enough, this could create an entirely new dynamic in the connectivity segments.

Sky is not primarily a mobile business and never will be. Its mobile offering is an element of the wider convergence strategy to attract and retain customers, therefore profitability on connectivity is not the only concern. It will be a consideration for the management team, but lower margins can be accepted if there is a greater gain in the bigger convergence picture.

Traditional players have been trying to shift away from being overly reliant on mobile revenues for years, with some success stories but most of the time a maintenance of the status quo. As Sky profits are not primarily reliant on mobile a potential loss-leader position could be created to cause havoc and grow profitability in other business units as well as the overall Sky business.

With all four MNOs and now Sky to offer 5G services to consumers by the end of the year, the UK is set to become one of the most interesting markets to watch worldwide.

Vodafone pumps Manchester for 5G ecosystem development

In a few weeks’ time, Vodafone will become the second telco in the UK to switch on its ‘5G’ network, but up in Manchester, the team is focusing on ecosystem development.

At an event dubbed ‘Go Beyond’, the Vodafone team launched its Digital Innovation Hub in an attempt to help the next-generation. This is perhaps one of the important facets of 5G which is missed in general discussions; 5G isn’t just about speed, its about offering new tools to innovators to create services which would not be deemed possible on 4G networks.

“The Digital Innovation Hub is an example of how we are empowering today’s start-ups and small businesses with the expertise and technologies to help turn their blueprints into reality,” said Anne Sheehan, Business Director at Vodafone UK. “Our 5G services can help UK start-ups become global leaders in their fields.”

For the telcos, being first to launch 5G offers a competitive edge in the utilitised world of connectivity, and also bragging rights, but there is a bigger win for the economies and societies which drive forward the fastest; the opportunity and ability to get a jump start to create services which will define the technology world of tomorrow.

This would appear to be one of the objectives behind the innovation hub opened here by Vodafone; put the technology in the hands of start-ups and entrepreneurs.

“Such investment and commitment from the private sector supports our ambition to make Salford one of the world’s most attractive cities for digital enterprises,” said Paul Dennett, City Major of Salford.

“It will also boost the local economy and help attract new jobs and opportunities for the people of Salford, Great Manchester and beyond. This commitment also further strengthens Salford’s Innovation Triangle connecting MediaCityUK with the University of Salford and Salford Royal Foundation Trust, our outstanding and leading hospital in the City.”

Think about the impact which 4G had on yesteryear and today. Many of the countries who were the first to launch 4G networks created some of the most influential technology companies in the industry today. Prior to 4G, Uber, Spotify, Tencent, Alibaba or AirBnB didn’t exist (or did but weren’t anywhere near at full scale), but with the new connectivity buzz, new jobs, wealth and segments were carved out.

Arguably the UK missed out on this craze. It was the 28th country to launch 4G networks, and while it maintains a healthy position in the technology standings today, other nations who were quicker to the finish line reaped greater benefits.

5G isn’t just about going faster, it is about having the opportunity to create services which are not conceivable today. But to do that, the networks need to up and running. With all four of the MNOs planning to launch 5G this year, and each taking a slightly different geographical rollout plan, the UK has an opportunity to capture the new revenue created through the upgraded networks.

The UK currently accounts for around 35% of all European unicorns created over the last few years, while the technology sector has outpaced average GDP growth by 4X since the European referendum. The technology sector is on the up in the UK, but 5G launches and scaled deployment are critical to ensure this position is not eclipsed by other nations.

Apple investors hope short-term pain will lead to long-term gain

16% growth in the steadily growing software and services business seems to be enough to rally investor confidence in the face of declining revenues.

Perhaps this is another lesson Apple can teach the world; how to effectively manage investor expectations. Total revenues are declining faster than the service division is growing, but with a 5.4% jump in share price in overnight trading, Apple investors seem to be buying into the short-term pain, long-term gain message from the technology giant.

For some the earning call might have been a shock to the system, explaining the immediate 1.93% drop in share price before markets closed. Total revenues for the quarter ending March 30 declined to $58 billion, down 5.2% year-on-year, while iPhone revenues dropped to $31 billion, a 17.8% dent in the same shipment figures from 2018. But the services division is the glimmer of hope.

“We had great results in a number of areas across our business,” said CEO Tim Cook during the earnings call. “It was our best quarter ever for Services with revenue reaching $11.5 billion.

“Subscriptions are a powerful driver of our Services business. We reached a new high of over 390 million paid subscriptions at the end of March, an increase of 30 million in the last quarter alone. This was also an incredibly important quarter for our Services moving forward.

“In March, we previewed a game-changing array of new services each of them rooted in principles that are fundamentally Apple. They’re easy to use. They feature unmatched attention to detail. They put a premium on user privacy and security. They’re expertly curated personalized and ready to be shared by everyone in your family.”

Although the Apple DNA is not rooted in the software and services world, this has to be the future. Overarching trends are indicating hardware is becoming increasingly commoditized, refreshment cycles are growing, and consumers are less likely to pay a premium for trusted brands. Apple is a company which defied these trends for a period, though not even the iLeader could deny the inevitable.

This is the critical importance of the software and services division; renewed, recurring and new revenues to replace the increasingly difficult, demanding and diversified hardware world, which is epitomised by the dreary global smartphone market.

Although Apple recently decided against releasing shipment figures during its earnings calls, it is still breaking out the revenues associated with products. The iPhone, the segment which drove growth in recent years, declined by 17.8% year-on-year. Part of this can be pinned on changing consumer behaviour, though you also have to look at the individual markets.

In China, Apple has been struggling. Canalys estimate smartphone shipments in the market have declined 3% year-on-year for Q1, though the locals are turning towards domestic brands. In years gone, Apple was a brand seen as somewhat of a status symbol, though it appears this is a concept which is quickly dissipating as the firm only collected 7.4% of market share over the first three months of 2019, a year-on-year decline of 30%.

Total revenues for China have not declined quite as dramatically, a 21.6% year-on-on-year dip to $10.2 billion, though Apple is not alone. OPPO, Xiaomi and Vivo also saw their year-on-year sales dip, with only Huawei coming out on the up. Here, Huawei managed to grow its shipments by 41%, taking 34% of the Chinese market share for Q1.

Another challenging market for Apple has been India. The story here is more forgiving however, as this is a much more cash-conscious market. Apple will of course want to maintain it position as a premium brand, therefore India, despite all the promise it offers, is not tailor made for its ambitions. Until consumer attitudes shift towards more premium devices, Apple will struggle.

Globally the smartphone market has not been helping either. According to Strategy Analytics, shipments decreased 4% year-on-year for the first quarter, with Apple slipping to third place overall.

Market share Q1 2019 Market share Q1 2018
Samsung 21.7% 22.6%
Huawei 17.9% 11.4%
Apple 13% 15.1%
Xiaomi 8.3% 8.2%
OPPO 7.7% 7%

These figures are not the end of the world, but it is a demonstration of consumer trends. There might still be an appetite for purchasing new devices, though there is seemingly a preference for those brands which might are cheaper. Such is the minimal differentiation between brands these days, why spend a premium when there is little need?

However, there is hope for Apple. Consumers might be getting frustrated over a lack of innovation in the hardware space, leading to longer refreshment cycles and a preference towards cheaper or refurbished devices, but the introduction of 5G might well change this.

With 5G devices being launched consumers will have something different to think about. Although 5G-capable devices are certainly not a necessity, and won’t be for a considerable amount of time, the ability to shout about something genuinely new might reinvigorate consumer appetite for purchasing new, and premium, devices. This could work in Apple’s favour.

That said, with Apple unlikely to release a 5G-capable device until 2020, the next few quarters could also demonstrate similar year-on-year declines. Apple seem to be happy to swallow this decline, sacrificing the ‘first to market’ accolade, but this how Apple traditionally approaches the market; it doesn’t aim to be first, but best.

For the moment, and the long-term health of the company, this does not seem to be the central point however. Apple is seemingly attempting to slightly shift the focus of the business, becoming more reliant on software and services, and it does seem to be working. As you can see from the table below, the ratio is shifting.

Product revenue Services Revenue Ratio
Q2 2019 46,565 11,450 81.3/19.7
Q1 2019 73,435 10,875 88.2/12.8
Q4 2018 52,919 9,981 84.1/15.9
Q3 2018 43,717 9,548 82.1/17.9
Q2 2018 51,947 9,190 85/15
Q1 2018 79,768 8,471 90.4/9.6
Q4 2017 44,078 8,501 85.9/16.1

The results in the table above do look quite confusing, though you have to consider that Q4 is usually the period for Apple’s flagship launch, skewing the figures towards the product segment, while Q1 accounts for Christmas, again tilting the figures. The general trend is looking favourable for the software and services division.

The last couple of months have seen Apple release several new services which will continue to bolster this division also. Whether it’s the content streaming service, news subscriptions, credit cards, iTunes or the App Store, the business is driving more investment and attention to this strange new world of software and recurring revenues. The ratio should continue to balance out, though we strongly suspect it will never get close to parity.

Another factor which you have to consider when it comes to the investors is the monetary gain. Yes, the long-term picture is looking healthier, but the firm has also announced it is increasing the dividend by 5%. This will keep cash-conscious and short-term investors happier, encouraging more to hold onto shares despite the downturn in revenues. The team has also announced a share buy-back scheme, up to $75 billion, which could be viewed as another move to protect share price. Although these could be viewed as short-term measures to cool the market, the overall business is looking healthier.

Apple is recentring the business, with more of a focus on software and services. The firm has defied the global hardware trends for some time, but they do seem to be catching up. What is important however is the management team recognising hardware will not be a suitable floatation device for Apple in the long-run. To continue dominating the technology world, Apple will have to spread its wing further into software, just as it is doing.

And perhaps the most critical factor of this transformation; investors seem to have confidence in the team’s ability to evolve.

Apple announces original content, a credit card and a news subscription service

Apple’s big services event didn’t disappoint, with a bunch of potentially disruptive launches together with new levels of hyperbole and clapping.

The headline service was Apple TV+, which marks Apple’s first major foray into original content. We were treated to an interminable procession of Hollywood types, starting with Stephen Spielberg and culminating with Oprah Winfrey, all taking it in turns to come onto the stage and hype their projects. Judging by the line-up Apple has realised it needs to spend big if it wants to take on the likes of Netflix.

As ever the audience of media and analysts at the live event were about as objective and sceptical as hungry puppies. Every pause in the polished narrative was filled with rapturous applause and ecstatic whoops. So choreographed was it that we wouldn’t be surprised if there were prompts and the tendency to cheer at the mere mention of a new product without waiting to even find out anything about it was especially jarring.

As was Apple CEO Tim Cook’s toe-curling hyperbole. “TV at its best enriches our lives and we can share it with the people we love,” he pronounced at the start of the TV announcement. The original content bit was preceded with the revelation that “great stories can change the world.” This sort of stuff was pretty hard to stomach when Steve Jobs was delivering it, but his messianic zeal just about pulled it off. Cook offers little such salve.

The other potentially disruptive announcement was a new Apple credit card called Apple Card. This had been rumoured for a while and, as expected, it has been create in partnership with Goldman Sachs and MasterCard. In reference to Apple Pay Cook felt compelled to say “Its growth has been literally off the charts,” for some reason. The most intriguing part of the card is the offer of 2% cash back on every purchase, which makes you wonder how much merchants are going to get stung for its use. There’s also a physical card made out of titanium that only offers 1% for some reason.

Apart from that we got a couple of new subscription services. The more significant one is for news and magazines that will set you back a tenner a month and will be positioned as a potential solution to the cash crisis faced by the media, but let’s see. “We believe in the power of journalism,” said Cook. There was also a teaser for a games subscription service that will offer exclusive titles and make it easier to play across platforms.

“We’re honoured that the absolute best line-up of storytellers in the world — both in front of and behind the camera — are coming to Apple TV+,” said Eddy Cue, Apple’s SVP of Internet Software and Services. “We’re thrilled to give viewers a sneak peek of Apple TV+ and cannot wait for them to tune in starting this fall. Apple TV+ will be home to some of the highest quality original storytelling that TV and movie lovers have seen yet.”

“Apple Card builds on the tremendous success of Apple Pay and delivers new experiences only possible with the power of iPhone,” said Jennifer Bailey, VP of Apple Pay. “Apple Card is designed to help customers lead a healthier financial life, which starts with a better understanding of their spending so they can make smarter choices with their money, transparency to help them understand how much it will cost if they want to pay over time and ways to help them pay down their balance.”

“We’re committed to supporting quality journalism, and with Apple News+, we want to celebrate the great work being done by magazines and news outlets,” said Lauren Kern, Editor in Chief of Apple News. “We think the breadth and quality of publications within Apple News+ will encourage more people to discover stories and titles they may never have come across before.”

Note Apple News has an Editor in Chief. Cook made it clear that Apple would only serve up the right kind of news for its subscribers and he has been clear about his willingness to impose a moral filter on everything Apple does. You have to wonder how empowered to interfere with the content published on Apple News this Editor in Chief will be.

“This represents a landmark moment for Apple with a major event solely focussed on services,” said Analyst Paolo Pescatore, who was at the event. “It underlines a growing and strong focus on services as a future source of revenue growth. In essence Apple is seeking to become a Netflix of everything in services; music, news and magazines, video and games.

“Netflix has done a great job to date. However, more content and media owners will pull programming off its offering. This represents a significant opportunity for the likes of Apple who has scale and greater resources. There are too many players chasing too few dollars. The market will evolve towards a handful of players in the future.”

Apple idiosyncrasies aside this felt like a fairly solid  launch event. The company has an amazing track record of disrupting industries and seems likely to do so again with original TV content and consumer finance. The scene is set for a content arms race with only the biggest spenders likely to survive and Apple has a deepest pockets of all. Game on, here are some vids.

 

Weak iPhone sales take bite out of Apple revenues

It might not come as a huge surprise, but the Apple financials are not as glorious and fruitful as the quarterly bonanza of yesteryear.

The devices market is plateauing, China’s economy is slowing, Indian consumers are more interested with other brands, iPhone sales are down, as is revenue and operating income, expenses are up. It doesn’t exactly paint a picture of serenity and profitability, but share price increased more than 5% in overnight trading.

CEO Tim Cook and his team did manage the situation quite effectively with a recent profit warning and have seemingly tabled a plan which has caught the interest of investors but let’s just put this overnight surge into perspective. The last couple of months have not been good for Apple. At the beginning of September, Apple share price was hovering around the $228 mark, while at the time of writing, it has declined more than 30% to $154. Cook should be nervous.

“Last night’s results beg the question, are investors falling out of love with Apple?” said Christopher Dembik, Head of Macro Analysis at Saxo Bank.

“The results of the former favourite stock – Apple was the fifth most traded stock by clients at Saxo Bank, behind Facebook, Amazon, Alibaba and Tesla – signalling a tough climate for traders right now with a gloomy global economy, weak returns across the board and whispers of another recession on the way.”

Apple Topline

Overall revenues were down to $84.3 billion, 5% lower than the same period in 2017, though it was in-line with the revised forecast from a few weeks back. For the next quarter, revenue is expected between $55 billion and $59 billion, with a gross margin between 37-38%.

Looking at the results, the iPhone weighed Apple down heavily. Shipment numbers will no-longer be released by the team, though revenues for the cornerstone product declined an almost inconceivable $9.1 billion, a 15% year-on-year drop, to $51.982 billion. This is still a huge amount of cash, but such a dramatic decline indicates someone got something very wrong somewhere.

The last couple of months of 2018 were a scrap for Apple to justify the pricing of its flagship devices. Cook and his cronies seem to have accepted what many people were telling them; the devices have become too expensive. Moving forward, the team seem to have indicated there will be price reductions.

This is what Apple have specialised in over the last few decades; customer loyalty and sweating the brand. There aren’t many cults out there who can count on their followers as loyally as Apple can count on the iLifers, but when the company was innovating they could justify marking a premium on products and rely on the Apple followers to make purchases. This doesn’t seem to be the case anymore.

If you look through the portfolio, none of the products are particularly mind-blowing. Yes, they might be high-spec and feature the Apple brand, but there has been little innovation in the last few years to justify the increasing prices. Married with consumers becoming more cash conscious, Apple has seemingly pushed its customers over the breaking point of what they are willing to spend.

That said, it isn’t just innovation which is to blame here, Apple is losing out to competitors in key markets. The Americas grew, though Europe, Japan and Greater China all declined. In the European and China markets, Chinese brands such as Huawei and One Plus has been gaining greater traction, with the price much more palatable for consumers. These are good devices which are offering just as technologically advanced features, suggesting Apple is losing the vice-like grip which it has on its customers.

Apple Breakdown

“And so, what we have done in January and in some locations and some products is essentially absorbed part or all of the foreign currency move as compared to last year and therefore get close or perhaps right on the local price from a year ago,” said Cook during the earnings call.

How much of an impact the price reductions will have remains to be seen, but what is worth noting is that there was some good news from the call. iPhone revenues might have plummeted over the period, but all other categories grew, including the much-valued software and services unit.

This is where Cook has been pinning his hopes, and there have been some gains. The software and services unit grew revenues by 19% year-on-year taking the total to $10.8 billion. Apple is attempting to evolve itself into a very different type of business, with recurring revenues as the ambition, though success has to be put into context. Yes, there have been gains, but it seems the dangers of the hardware world are being realised much faster than the benefits of software evolution.

Apple has largely struggled in the world of software and services, perhaps because its traditional business model is not suitable. When you look at where Apple has been successful in software and services, iTunes, AppleCare and iOS for example, these are all areas which tie the customer into the Apple ecosystem. They are products which build on the Steve Jobs mantra of ‘closed is better’. However, Apple will have to embrace a new mentality is it wants to succeed in the new world.

At CES, Apple captured most of the headlines without actually being there as it announced a content-based partnership with Samsung. Beginning in the Spring, new Samsung Smart TV models will offer iTunes Movies & TV Shows and Apple AirPlay 2 support for Apple customers. This is a good move from Apple, embracing the concepts of openness and collaboration which will be critical moving forwards.

Another interesting development, which has remained unconfirmed, is the creation of a Netflix-like gaming platform. Apple would herd developers and gaming content behind a paywall which will offered as a bundle service for customers. The subscription service would take Apple into a potentially profitable segment, which is set to boom over the coming years. However, this cannot be tied exclusively to Apple products and would have to demonstrate openness.

The last few months have shown that Apple is not immune to global trends and the need to evolve as a business is overdue. The reason companies like Google and Amazon never report revenue dips like this is they are constantly searching for the next idea. Apple might have been slow to react, but there is some progress being made. It just needs to be made quicker.

Apple finds the water is warming up in App Store legal battle

Apple has found itself in court once again, but Qualcomm is no-where to be seen. Instead, a few of its loyal iLifers are challenging the firm over whether the App Store is an illegal monopoly.

The case itself dates back to 2012 and will aim to understand whether Apple is operating an unjustified monopoly through the App Store. Right now the case is in front of the Supreme Court, where the nine judges will decide whether or not to allow the antitrust case to be heard by a District Court. The permission from five of the nine judges are needed for the case to proceed, and currently, it looks like only Chief Justice John Roberts is siding with the iGiant.

For Apple, this case could be a disaster. Permission to take the case to one of the District Courts, likely to be in one of the thirty states where the Attorney General is backing the iPhone users’ antitrust claims, and the door could be opened. Essentially anyone who has purchased an app from the App Store could claim grievances against Apple.

The case itself is relatively simple on the surface. As the App Store is the only place to download apps without breaking rules, should the 30% commission charged by Apple be viewed as the company unjustly profiting from a monopoly? One could argue prices are inflated due to the commission received by Apple, though its own counter-argument is based on legal precedent which dictates only those who have a direct billing relationship with a company can sue the firm.

In the Supreme Court’s 1977 decision in Illinois Brick Co. v. Illinois, the court stated only consumers who are direct purchasers of a product can bring a lawsuit seeking damages available for violations of federal antitrust laws. As customer purchase apps from developers, who in turn pay Apple the commission, Apple has argued there is no legal basis for iPhone users to sue the company, with the developers being the only ones who could make such claims. Chief Justice Roberts believes this argument, though spectators of the case have stated five of the judges are leaning the other direction. This could well develop into a very serious headache before too long.

On the other side of the aisle, the iPhone users, led by chief plaintiff Robert Pepper, argue prices would be lower if there were greater choices of app stores. This is a perfectly logical conclusion, though the developers might not like it. As it stands they have a captive audience with all iPhone users in one marketplace. Yes, they do have to pay Apple a premium, but this might well be a pill worth swallowing compared to the complications of working with multiple partners and a disaggregated audience.

As with many lawsuits in the digital economy, this is the first time such arguments are being considered by the courts. Precedent will be set which is what makes this case particularly interesting. Should the courts side with the iPhone users, the doors could be opened for lawsuits against other eCommerce giants such as Amazon or Facebook. Anyone who takes a commission based on a percentage could be viewed as falsely inflating prices in the pursuit of profit, or so the argument would be.

Apple has argued opening this door could stifle the growth of the burgeoning eCommerce sector, which is a negative consequence of course, but not an adequate reason for the case to be dismissed. Just because there is significant consequence does not mean unjust activities should be allowed to continue.

The App Store has started to generate some considerable income for Apple. On the financial side of things, over the last three months the services division, which include the App Store, produced revenues of $9.9 billion, up 17% year-on-year. With smartphone growth slowing globally, and the iPhone not proving the success some might have hoped in emerging markets, the services segment will become ever more important to the iChief.

A decision on whether the case can be heard by one of the District Courts will be made in the near future, though there will be quite a few eye balls on this one. The splash could be quite considerable for Apple, though the ripples through the rest of the digital ecosystem will be just as concerning.

iPhone X drives Apple growth past analyst expectations

Apple has reported its quarterly results for the three months ending June 30, collecting an eye-watering $585 million in revenue a day over the period.

Total revenues stood at $53.3 billion, a year-on-year increase of 17%, with iPhone X sales and the services business unit leading the charge with year-on-year rises of 20% and 31% respectively compared to the same period of 2017. While it might have been a slow-start for the ridiculously expensive flagship device, the premium seems to compensated for slightly jaded 1% increase in smartphone shipments.

“We’re thrilled to report Apple’s best June quarter ever, and our fourth consecutive quarter of double-digit revenue growth,” said CEO Tim Cook. “Our Q3 results were driven by continued strong sales of iPhone, Services and Wearables, and we are very excited about the products and services in our pipeline.”

“Our strong business performance drove revenue growth in each of our geographic segments, net income of $11.5 billion, and operating cash flow of $14.5 billion,” said Luca Maestri, Apple’s CFO. “We returned almost $25 billion to investors through our capital return program during the quarter, including $20 billion in share repurchases.”

Looking deeper into the business, Cook pointed towards first time buyers of the iPhone as a win, while the services unit brought in record revenue of $9.5 billion. Paid subscriptions from Apple and third parties have now surpassed $300 million, an increase of more than 60% in the past 12 months, while the CEO also claims the App Store generated nearly twice the revenue of Google Play so far in 2018.

Services is a significant growth area for the iChief, which seems to be able to print cash with whatever it touches (except original content… who remembers Shark Tank). Apple Music grew by over 50%, AppleCare revenue grew at its highest rate in 18 quarters, and Cloud services revenue was also up over 50%. When you also tie in the wearables division, which finally seems to be making progress, its smart speaker reaching new markets, Siri improving and products like Apple TV gaining a bit of traction, Apple is giving a perfect lesson in exploiting customer loyalty.

Looking forward, the Apple train looks like it will continue to print off cash. For the next quarter, the team expects revenue between $60 billion and $62 billion, compared to $52.6 billion brought in during Q4 2017, with a gross margin between 38% and 38.5%.