A Naïve, Nostalgic Look at Apple’s Business Model ⇥ mondaynote.com
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.
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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 form the $48B iPhone revenue for that quarter.
This changes the business model’s “center of gravity”.
Apple’s business model is still admirably simple compared to many of its biggest competitors. Facebook and Google sell advertisements against scraped user data and profiling; Microsoft and Amazon are more diversified, but a large slice of their revenue comes from enterprise and government contracts. Apple, for the most part, sells physical products, bytes, and service contracts to end users.
But this new focus on recurring services revenue — predictable monthly payments from as many buyers as possible — has created plenty of opportunities for Apple to degrade its existing product offerings. As the iTunes Store gave way to the Apple Music streaming model, iTunes was replaced with the much worse Music app, which feels like an old <frame>-based website given the façade of a desktop application. Applications across MacOS and iOS now interrupt users with advertisements in a nagging reminder that your multi-thousand-dollar purchase of a hardware product is merely the beginning of your financial relationship with Apple.
I understand why this is happening, but a pivot to services is a hard turn for Apple to make, and I feel it is not executing it as gracefully as it could — and should — be.
As Gassée writes, the definition Apple uses for reporting revenue in its Services category is pretty broad. This is how Apple described the category in its most recent annual filing:
Services net sales include sales from the Company’s advertising, AppleCare, digital content and other services. Services net sales also include amortization of the deferred value of Maps, Siri, and free iCloud storage and Apple TV+ services, which are bundled in the sales price of certain products.
One thing not mentioned by either Gassée or Apple is that about one-fifth to one-quarter of Apple’s services revenue is from Google for making it the default search engine across Apple’s ecosystem. I mentally subtract $3 billion from this category in the quarterly earnings report to create a truer estimation of how Apple’s own-brand services are performing.