Author: Marge
If you use the “ten-year challenge” currently popular on the Internet to look at Apple's development, this tech giant has the meaning of falling to Binh Yang.
Ten years ago, the iPhone redefined mobile phones with its genius design and excellent user experience, and ushered in a new era of smart hardware. Thousands of people lined up all night to buy at a high price in order to use the latest iPhone as soon as possible.
Ten years later, the design and quality of the new iPhone has been criticized, and it has become a “rib” that is regrettable to be discarded without food. Even if the price was lowered many times, no one paid attention to it. It even caused scalpers to cry without tears, dragging down Apple's stock price to plummet.
This is a brilliant decade for Apple — from 2012-2017, for five consecutive years, Apple became the Dow Jones company with the largest market capitalization in the world at the end of the year.
This is also the decade that Apple has left the world — the reputation of Apple products is becoming increasingly worrisome, and Huawei and Xiaomi have risen one after another to seize the market.
At this critical point where there are many crises, Jobs' successor, Cook, the former savior of Apple, has once again begun a journey to “save” Apple: Apple, which is dominated by hardware sales, has begun to transform into a service business; the once completely closed Apple ecosystem has also gradually opened a rift.
This kind of idea between Apple and founder Jobs seems to be getting farther and farther away, but this kind of choice is also inevitable for Apple to get out of trouble.
One. Falling apple
“Apple is slow to sell, help us.”
When the joke image of Cook being turned into an old farmer and a poor looking man guarding a car of a real apple was widely circulated, the iPhone's sales problem was already quite serious.
The sales performance of the three iPhones released by Apple in 2018 is second only to the iPhone 6S series launched in 2015, ranking second worst in sales volume in Apple history.
Sales of the flagship iPhone XS and XS Max slowed sharply last month, leading to a surge in inventories; sales of the mid-range iPhone XR have been weak since its launch, and there has been no improvement under the impetus of many intense promotions.
China is Apple's second largest market. The success of the iPhone is also China, and the loss is also China.
According to UBS data, the iPhone's sales volume in China in the past four years was 71 million units in 2015, 59 million units in 2016, 49 million units in 2017, and an estimated 47 million units in 2018.
The declining trend year by year has been seen by Apple and adopted a price-offsetting strategy as a countermeasure — in recent years, the price of the new iPhone has reached new highs.
Although higher selling prices have whitewashed the embarrassment of declining iPhone sales, and Apple's overall performance is still impressive, excessive pricing has in turn curtailed sales to a certain extent. Apple seems to be caught in a vicious cycle.
In a letter to investors released two weeks ago, Cook acknowledged that Apple has experienced “Waterloo” in China: “Although we expect major emerging markets to face some challenges, we have not anticipated the extent of the economic slowdown, particularly in Greater China.”
Based on this, Cook also lowered its revenue expectations for Apple's current fiscal quarter: revenue for the first quarter of FY2019 is expected to be 84 billion US dollars, compared to the previous guidance of 89-93 billion US dollars; the reduction in gross margin to 38% is the lower limit of the guide range.
After the letter to investors was published, Apple suspended trading after the market and plummeted by as much as 8% after the resumption. After ten years of glory, Apple has fallen into the biggest crisis since Jobs left the company in the 80s of the last century.
“I don't understand the market,” “I have no innovation,” and “the family business that lost Jobs”... Various negative labels have been placed on Cook one after another. But people forget that Cook came to Apple as a savior.
In 1998, at Apple's headquarters in California, after 5 minutes of talks with Jobs, Cook decided to switch from Compaq to Apple, which was in crisis at the time, as chief operating officer.
A newcomer, Cook, allowed Apple, which lost nearly 2 billion US dollars, to turn a loss into a profit in the first quarter of fiscal year 1998. The rich cash flow he brought to Apple was a prerequisite for Jobs' ability to realize all kinds of “crazy” ideas.
The secret to Cook's success is control over the supply chain. In his eyes, inventory is the devil, and managing inventory is like managing milk. “If milk expires, you will soon be in trouble.”
Jobs reduced Apple's inventory to 31 days, and Cook was at its peak: in September 1998, Apple's inventory remained at 6 days; in 1999, this figure was reduced to 2 days. Today, Apple has one of the world's best supply chains.
In August 2011, Cook officially became Apple's CEO, bringing Apple to a new peak amid a wave of questions: the iPad mini launched in 2012 became the best-selling tablet in history; the iPhone 6, which was launched in 2015, became the best-selling Apple phone in history.
However, ten years after the iPhone was born, the former “inventory removal experts” and “hot model makers” sadly discovered that Apple had fallen on the sales and inventory removal issues that it was originally best at.
There is no shortage of truth in the outside world's accusations against Cook, but it is actually unfair to make him bear all the charges.
When the iPhone 4S was first introduced in 2011, questions about Apple's “no longer innovating” and “eating old things” were all over the place, but all of this disappeared when Jobs passed away on the second day of the press conference.
In other words, the decline of the iPhone can be traced back to the end of the Jobs era. However, the flourishing performance of Apple over the years is enough to silence questions.
The development of business giants is inertial. They rarely adopt radical innovation, and are more passive in carrying out changes. In the tech sector, there are not a few giants who have died because they refuse to change, change too slowly, or are in the wrong direction.
Nokia, Ericsson, Motorola, Siemens... it was only a moment when the names that were once popular went from great prosperity to decline.
As Apple's savior in the past, Cook, who has a calm and calm personality, is not someone who stands still on his own feet. He, who is extremely concerned about inventory, has actually noticed hidden sales risks and quietly began preliminary research on Apple's business transformation.
II. Reinvent a Netflix
This time, Cook is shifting his focus from consumer hardware to service businesses, and even has a tendency to restructure Apple's ecological culture.
Not long ago, Samsung announced that Apple's iTunes software will be available on Samsung smart TVs. These TVs also support Apple's unique wireless communication technology, AirPlay 2, which allows users of Apple devices to post content directly on the TV.
Prior to that, TV manufacturers such as LG, Sony, and Ruixuan also reached a similar cooperation with Apple, and their TVs will be able to play videos from Apple devices. In December of last year, Amazon also announced that its smart voice assistant, Alexa, can use Apple Music services.
Apple's quality service is also a large part of the rationality of its high price policy due to the fact that software and services are limited to the use of Apple devices.
As a result, the above cooperation was unbelievable before, not to mention that for quite some time, market disputes and patent disputes between Apple and Samsung have been raging.
This kind of cooperation also means that Apple has carved out “holes” that can penetrate light one by one in its own airtight ecological fence.
In 2007/6, Apple released the first iPhone, and Jobs refused to authorize other manufacturers to use the iOS system. In stark contrast to this, in November of the same year, Google developed the Android system and generously licensed it to various manufacturers.
Over the years, Apple has firmly taken control of software development and sales, and has earned a lot of revenue as a result. Because of the ecological closure, users of Apple devices had an excellent experience, but also because it refused to be open and inclusive, Apple gave rivals an opportunity to eat away at market share.
Apple isn't the first tech giant to take full control of the ecosystem. Both Microsoft and Sony had intended to dominate the ecosystem, but their ambitions failed.
Now, as iPhone sales continue to decline, opening up is not only a necessary means for Apple to maintain growth, but also a matter of life and death. It seems that Apple is finally willing to sacrifice some hardware sales in exchange for continued service business growth.
This is why in his letter to investors, in addition to acknowledging and warning of the decline in iPhone sales, Cook emphasized the importance of the service business.
As of December last year, compared to the previous quarter, Apple's service business, including App Store sales, streaming music subscriptions, and mobile payment services, had revenue of US$10.8 billion.
This collaboration with Samsung and other manufacturers shows that Apple places more importance on music and video subscription services than on sales of hardware such as its HomePod and Apple TV. In the words of tech analyst Ben Bajarin (Ben Bajarin), this is because “you can't ensure that everyone uses an iPhone.”
If the rumor that Apple is planning a Netflix-style streaming service is true, then this kind of collaboration makes more sense.
According to reports, Apple is preparing to spend 1 billion US dollars on the production of original streaming programs. The cost includes inviting well-known talk show host Oprah Winfrey and famous director Stephen Spielberg.
Apple is making such a big deal in entertainment services, and its target audience is definitely not limited to its own Apple TV users. After all, the Apple TV market is not attractive enough to support such huge investment: last year, only 15% of American households installed Apple TV, compared to 19% in 2016.
A similar eco-opening strategy is new to Apple, but not unfamiliar to other tech giants such as Google and Amazon. For example, you don't need an Android phone to use the Gmail service, and you don't need a Kindle to read Amazon e-books.
But moving from closure to openness, the example that has moved Cook the most is probably Microsoft.
After becoming the CEO of Microsoft, Nadella resolutely cut out hardware businesses such as Windows Phone, bet on Microsoft Office and Azure cloud services, and extended these services to all devices as much as possible, no matter what system the device runs on.
His strategy has been effective, helping Microsoft successfully transform and once again become the largest company in the world by market capitalization, surpassing Apple and Amazon several times after many years.
The transformation path that Cook chose for Apple looked like a copy of Microsoft.
Tech analyst Patrick Moorhead (Patrick Moorhead) said, “In a sense, this is a defensive measure taken by Apple.” Not everyone is willing to pay for the brand's premium Apple devices. So, Apple turned to betting on usability and coverage to boost overall service subscription rates.
For example, Apple abandoned the requirement for partner devices to use Apple-certified chips to support AirPlay 2. This is one of the important reasons why top TV manufacturers are willing to cooperate with Apple recently.
Furthermore, in most parts of the world, the Android system is mainstream. Moorhead believes (collaborating with mainstream TV manufacturers) “will give three-quarters of the world an apple 'taste' that has never been enjoyed before.” This is quite attractive to them.
Three. Where is the Apple tax going?
However, Apple's transformation is only in the initial stages, and the road ahead is fraught with thorns.
Although it has taken the first step of opening up, Apple has not shown a strong will to extend its services to a wider range of devices, nor has it shown the ability to develop services that can stand side by side with other tech giants such as Facebook or Google. These competitors are always continuously optimizing their software and fully exploiting user data to provide personalized services.
The service business is Apple's fastest-growing segment. In 2017, Cook set a “small goal” for Apple — to double the revenue of this portion of the business to $50 billion by 2020. In the last fiscal year, Apple's service business revenue rose 33% to 39.75 billion US dollars, and Apple is making great strides towards the goals set by Cook.
However, Apple's service business is still limited by hardware sales.
Since Apple's ecosystem has not yet been fully opened up, Apple's hardware sales and service revenue are still closely linked and mutually reinforcing. Apple emphasized an 18% year-on-year increase in revenue from its service business, but analysts' expectations were 24%. This shows convergence with the decline in iPhone sales.
Under these circumstances, people can't help but ask, how can Apple make up for the decline in hardware sales by increasing service revenue, as Cook said?
According to data from investment bank Jefferies LLC, the App Store is the biggest revenue contributor to Apple's service business, accounting for 35%.
App Store revenue mainly comes from Apple's 30% share of software sales. Since 2014, the App Store's revenue has tripled to US$44.49 billion, yet the startling numbers are overwhelming.
In addition to the decline in iPhone sales, App Store sales were also impacted by integrated apps such as WeChat and Alipay. The all-encompassing functionality offered by these apps makes other apps in the App Store less appealing.
Cook claims to have set a record level of service revenue for the Chinese region in the previous quarter. “We believe our business in China has a bright future.” He said in a letter to investors.
However, Sensor Tower's data hit Cook in the face: Last year, App Store sales in China rose 14%, almost a fraction of the average compound annual growth rate of over 120% between 2012 and 2018.
Notably, App Store sales growth in the US also declined slightly last year. Although emerging markets such as India are developing rapidly, there is still a big gap compared to the size of the US market.
Meanwhile, Apple is anxiously awaiting the US Supreme Court ruling on the App Store monopoly. If the Supreme Court determines that a monopoly has been established, it will be difficult for Apple to easily enjoy 30% of the share in the future.
The 30% cut, known as the “apple tax,” has long been unpopular. The major app developers “have been struggling for a long time,” and all are looking for an opportunity to overthrow the “hegemony” established by Apple through its ecological monopoly.
Streaming giant Netflix and game company Epic Games have begun refusing to share with Apple. Netflix plans to stop using Apple's billing system for new users, while Epic Games has decided to set up its own app store, with a percentage ratio of only 12%.
In terms of other services, Apple's performance was also quite poor. Since its launch, the Apple Maps service has been criticized for its high level of distortion, and the much-regarded Apple Pay has not been able to open up the situation.
In October 2018, Cook used Apple Pay to board a ferry in Shanghai, but he did not succeed even once. Although there was later news that Cook had misscanned the QR code at the gate, this still showed that Apple Pay was struggling in the Chinese market.
Apple Pay's performance outside of China was just as disappointing. In 2016, when Cook was preparing to pay with Apple Pay at a coffee shop in Germany, he was told by a store clerk that the store did not support Apple Pay.
Authorization revenue is also expected to grow at a slower pace. In order to become the default search engine for Apple's Safari browser, Google paid Apple up to 9 billion US dollars, but it is expected that Google will reduce this part of the investment.
There are many difficulties, but Apple's transformation is imminent.
Due to the ongoing stalemate in the patent dispute with Qualcomm, some iPhone models have been banned from sale by Chinese and German courts. This has forced Apple to speed up the transition to a service-oriented business.
The perfect circumstances of Jobs' life made him demand full end-to-end control of the product. It is said that if he sees Apple's software running on hardware that he sees as crappy, he will feel unwell all over his body.
Cook's permission to run Apple software on non-Apple hardware, even if the degree of openness is limited, is essentially a subversion of Jobs' core ideas.
Apple's daring to “de-jobize” is worthy of recognition; no company can “make a fresh move” forever. However, at present, two-thirds of Apple's revenue still comes from the iPhone. It is still unknown how far its self-innovation can go and how far it will be accepted by consumers and investors.
The transformation of a giant like an elephant is no easy task.