During the iPhone’s explosive growth period, Apple followed through on Steve Jobs’ strategy. Keep the price of the hardware high, but keep the price of software and services as low as possible. That juiced Apple’s revenue and profits to record-breaking levels. Now the hardware market is saturated, iPhone sales are no longer climbing, and Tim Cook’s Apple has to turn around years of dogma to build a new business model.
Steve Jobs’ strategy had a flaw. At some point, you no longer have room to grow.
On hardware pricing, Apple has lost its unified approach across the world, with significant price cuts in China to fight allying demand sitting alongside efforts in India to raise the average selling price by removing the lower-priced handsets from the portfolio. In the US and Europe, Apple has been offering significant discounts on the iPhone, albeit through trade-in in older handsets.
Keeping the price of the hardware high is proving to be an increasingly difficult strategy. Exchanging market share to maintain a higher price cannot go on forever. Something has to change.
Tim Cook has been clear over the last year that he believes the future for Apple is to be a ‘services first’ company, with a target for revenue from services to double from $41 billion in 2016 to $82 billion in 2020. Of course there’s no indication on the profit margin that the various services offer, so it’s questionable if the App Store, a streaming TV service, or all-you-can listen to music subscriptions can offer the same return as the iPhone in its heyday.
But there’s a clash at the heart of this software-first strategy… you need a lot of users to make it work. That’s generally why software based companies tend to ‘give away’ key elements to build an audience (just look at Google’s efforts to grow with Android).
Cook’s Apple wants to have a profitable software and services arm. It also wants to keep the prices high on the hardware that are needed to access these services. I don’t believe that it can manage both. So which will it be?