Apple: the largest publicly-traded company in the world.
Notice what I didn’t say here: I didn’t label Apple as a tech company because, arguably,
it isn’t one and it definitely doesn’t want to be.
With its Keynote event in March 2019, Apple made clear that it’s setting course for
a new future, one following in the footsteps of Disney, Netflix and, especially, Amazon.
In this video we’ll see how Apple plans on breaking out from its history as a hardware
seller and on transforming into a digital services company.
This video is brought to you by Skillshare, where you can watch my two classes on how
the stock market works.
In January 2019, Apple CEO Tim Cook sent a letter to Apple investors, in which he addressed
what was clearly a very disappointing quarter for the company.
Apple’s largest hardware markets— that’s smartphones, personal computers, and tablets—
are all stagnating, and while Apple is compensating to some extent by constantly increasing the
price of everything, at the end of the day there’s only so much people are willing
to pay for an iPhone.
This is not to say that Apple’s hardware division is going out of business, no: Apple
will continue selling hundreds of millions of iPhones, in addition to wearables and iMacs.
However, it has become clear that hardware alone isn’t enough to keep Apple on top,
at least not like it has done for the past two decades.
Apple needs to branch out into new markets— not geographically, but digitally, and the
frontier they’ve chosen to attack is the service business.
Now, this might not sound particularly innovative, and that’s true: going into services seems
to be the trend nowadays, with Amazon, of course, being the most notable example as
it continues to expand the full range of its services under Amazon Prime.
Unlike Amazon, Apple’s offerings are much more disjointed, even though it is Apple that
has the hardware ecosystem to keep everything under the same roof.
Let’s look at the current state of Apple’s services: you have AppleCare warranties, iCloud
storage for when your phone runs out of space, which it definitely will, and then you have
Apple Music, which even though it reportedly has 50 million subscribers, it’s still nothing
really revolutionary compared to its competition.
All these services reflect Apple’s nature as a hardware-oriented business, a nature
that Tim Cook is doing his best to outgrow.
So, how is he gonna do it?
Luckily for Tim, he has a great example to go by: Jeff Bezos was the true vanguard in
the services space at that scale with Amazon Prime.
Originally, Prime began as a simple extension of the Amazon marketplace: you pay a subscription
and you get cheaper and faster shipping.
This core function is still at the heart of Amazon Prime, even after Bezos added free
streaming, music, photo storage, e-books and everything else to it.
If Tim Cook wants Apple to become a service company, he needs to find a cornerstone around
which to base the entire service offering and interestingly enough, he already has the
answer.
In 2015, Apple launched the iPhone Upgrade Program, where customers pay a monthly fee
in exchange for having the newest iPhone every year.
This program transforms the iPhone itself into a service, by moving away from device
ownership and towards device leasing.
With this program serving as the foundation, we can easily imagine Apple Prime, where you
get the iPhone and the full-range of Apple’s services in a single package.
Now, at present, there aren’t enough services Apple provides to warrant such a drastic move,
but Tim Cook is doing his best to fix this.
In the March Keynote Event he announced a bunch of new services that would make Apple
Prime a much more lucrative proposition.
Perhaps the biggest one is Apple’s original content service, called Apple TV+.
While to an outsider this might seem like a declaration of war on Netflix and Disney,
who by the way are also setting up a service of their own in Disney+, in reality Apple
doesn’t have to compete at all.
Apple TV+ has the significant advantage of being bankrolled by a company with very deep
pockets, meaning that Apple TV+ doesn’t have to become profitable, ever, as long as
it produces enough value for Apple Prime.
Although Apple TV+ content doesn’t roll out until late 2019, we already know that
it will be pre-installed on Apple’s base of 1.4 billion active devices, giving it a
huge advantage over streaming services that don’t have devices of their own.
The biggest tip-off, however, that Apple Prime is coming is Apple’s seemingly out-of-nowhere
decision to also offer a credit card.
The aptly named Apple Card shows Tim Cook’s intentions: he not only wants to sell you
services, but also wants to offer and monitor your means to buy them.
That’s why the card comes with no annual fees, not late payment charges and a lower
than average interest rate: it’s purpose isn’t to make money, but to make your entry
into the upcoming Apple service system much more difficult to reverse.
The Apple Card after all, doesn’t have a card number, signature or CVV code and its
whole idea is to be used as part of Apple Pay.
When exactly will Tim Cook formally announce Apple Prime is anyone’s guess, but the building
blocks are already in place.
Service revenue has only been going up these past few years, so it’s probably a safe
bet that Apple Prime isn’t too far off.
Now, if you’re curious about Apple’s revenues and margins, and really wanna dive deep into
their upcoming transition to a service company, you’ll probably enjoy learning how to analyze
companies from my two courses on Skillshare.
They’re gonna teach you all about how companies work and how the stock market values them,
including a few examples with Apple itself.
You can watch my classes for free right now if you’re one of the first 500 people to
register with the link in the description, which will give you access to Skillshare’s
vast selection of courses on virtually any topic you might have an interest in.
Once you’ve signed up there you should also follow me on Instagram to watch the awesome
teasers I post for every upcoming video.
We’re gonna hear each again in two weeks, and until then: stay smart.