Apple’s taken a beating since announcing its Q4 earnings last week.
The stock price is off nearly 7 percent, even though its trillion-dollar market cap remains intact.
Analysts and the media smelled blood in the water after CEO Tim Cook said Apple would stop reporting unit sales of its products, including its crown jewel, the iPhone, next quarter. This came on the heels of reported iPhone sales that didn’t meet analyst expectations.
That means Apple won’t tell the world how many — or how few — iPhones were sold over the all-important holiday season, and in the all-important months following the release of three brand-new iPhone models.
Or at any other time — unless it wants to.
The Wall Street Journal threw some serious shade on that move, citing Steve Jobs’ reaction to Amazon’s decision in 2009 to do the same for the Kindle — that it must not be selling many. Jobs’ point then was that if a company is selling a lot of stuff, they want to tell people about it. If they aren’t, then they don’t.
Which, of course, is the iPhone story.
Last week, I talked about seven scary things for the platform giants. For Apple, it was consumers not buying iPhones at the frequency they once did.
In that piece, I explained the reasons why consumers now take longer to upgrade their iPhones. Instead of shelling out a thousand or fifteen hundred bucks for a new iPhone that looks just like the one in their hand today, the iPhone’s 1.3 billion installed user base is increasingly just upgrading the iOS to get new features and functions. Proving that point, a month after iOS V.12 was released, Apple reported that 50 percent of all active iOS users had upgraded.
The combination of pricier phones and longer upgrade cycles, which experts say will stretch to just shy of three years in 2020, hits Apple particularly hard.
So, how’s Apple going to make that up?
Well, they aren’t being shy about the answer.
They say, quite loudly and clearly, that they plan to make it up from their Services businesses. And that largely means the app ecosystem.
So, all the apps in the App Store better buckle up, and be prepared to pay up, to remain a part of Apple’s ecosystem.
After all, it costs money to support a trillion-dollar company.
The Services Handwriting on the Wall
Don’t say I didn’t warn you back in June of 2016.
Cook said last week that iPhone unit sales are no longer the right metric for measuring Apple’s success. What he believes will replace that metric — because it has to — is what he’s been talking up with analysts over the last two years, using a talk track that more recently has compared Apple’s Services largesse as equivalent in size to a Fortune 100 company.
In June of 2016, Apple gave developers a bigger incentive to capture more revenue from their apps in the App Store — and for Apple to collect more of it too.
That was the year Apple gave developers a big pay raise on apps with a subscription business model. Instead of the 30 percent Apple used to collect in perpetuity for those in-app subscriptions, it reduced its cut to 15 percent for those that were downloaded and kept active for more than a single year.
It did so because apps like Netflix were avoiding signing up subscribers through the App Store to evade the Apple tax. Apple figured it was better to cut the ongoing tax to get subscription plays on board.
Subscription models, of course, are the “it” thing in payments, and Apple’s revenue boost was to further incent developers to hop onto that recurring revenue bandwagon for the digital goods intended to be consumed on the Apple platform — books, news and media content, games, productivity tools used digitally, streaming music or video services. Apple provided a very thorough set of operating guidelines for how developers could do that, including some 200 permutations of subscription price points that were all inbounds.
Apple also provided very clear instructions for how those purchases must be made — which is via Apple’s iTunes payments platform — 100 percent of the time.
Although developers can acquire customers off the App Store, register them off the App Store and enable their use on Apple’s platform, trying to sidestep Apple by directing people off the app to register will get you kicked off the platform, probably forever.
That means it’s totally within bounds for Amazon to acquire Kindle consumers on Amazon.com, and for Apple to allow those consumers to download the Kindle app and consume those Kindle purchases on Apple devices — which it does. In fact, the only way Kindle purchases can be consumed on Apple devices is if the consumer activates those purchases on Amazon.com — and that’s how Amazon wants it.
That also means Netflix and Spotify can — and do — enroll and activate consumers off the App Store and give those consumers access to those services on Apple devices too. It’s been reported that Netflix is doubling down on this front in 33 countries as part of a reactivation and new customer acquisition initiative. Netflix reports that roughly 35 percentof its customers come by way of App Store platforms — both Apple and Google Play combined.
But that also means Netflix and Spotify must pay their 15/30 percent cut to Apple if that consumer was acquired via the App Store, even if the consumer uses those services largely off the Apple platform — on Xboxes, PCs, TVs, smart speakers, in-dash applications, etc.
That still gives apps like Netflix and Spotify pause — and for legitimate reasons.
The App Usage/Spend Mismatch
According to October 2018 App Annie data, although Netflix is the №1 app across all app stores as measured by consumer spend, it’s tenth when it comes to usage and downloads.
There, Facebook’s properties — Messenger, Instagram, WhatsApp and Facebook — take four out of the top five spots.
Apple made $11 billion in 2017 from App Store revenues — collected from in-app purchases, paid apps and ad revenue from promoted apps in the App Store, and plenty more from its own subscription services, like Apple Music.
But there’s only so much Apple can do to drive organic growth from its own subscriptions. And it will take time for Apple to buy and then assimilate any content platforms and the revenue generated along with them.
Until then, simply adding a toll collector for subscription apps for digital services isn’t going to give Apple the Services revenue boost it needs to blunt the reality of diminishing iPhone revenue.
That’s particularly true because the big players that drive lots of consumer spend today via the App Store have enough brand recognition and other, less costly, consumer acquisition channels available to acquire and activate customers.
And it’s also because most developers haven’t yet taken the digital subscription app bait — only 20 percent of them have opted into such a subscription model since the June 2016 announcement. Those who have taken the leap say they are seeing revenue increases, which means Apple is seeing that too. But the 80 percent still on the sidelines don’t seem convinced that either their services are well-suited to such a model or that they want to adapt their solutions so that they are.
So, for Apple to move the Services revenue, it needs to do a lot more.
The Apple Tax Man Cometh
Like, it needs to figure out a way to tax all of the other apps in the App Store.
For starters, it could extend the tax to free digital apps, particularly the ones that make their money off advertising.
Most would probably pay a fee to be available for download in the App Store and to be used on the iPhone. Google already pays Apple for a privileged position in the app ecosystem. Maybe Apple will decide that Facebook — which isn’t exactly a pauper — should pay up too.
Then there are the subscriptions for products and services activated in the App Store for services consumed off the Apple platform — such as meal kits, box-of-the-month club offerings and delivery services — all of which are today excluded from the Apple revenue tax.
In fact, Apple’s terms of service specifically say that payment for those in-app services must be done outside the app — via traditional credit card, mobile wallets or Apple Pay — because the iTunes payment system that collects the tax can’t monitor or meter those transactions.
But maybe not for long.
There’s nothing to prevent Apple from deciding that some portion of those subscription activations are paid to Apple — in much the same way as those services might expect to pay any other customer activation channel for finding and converting a qualified lead.
Maybe that’s not 15 or 30 percent, since the price of those subscriptions is higher, but Apple could decide the activation of every new Blue Apron, Dollar Shave Club, BarkBox, Wag, Stitch Fix, Birchbox, Fabletics or any one of the growing number of automobile subscription services will come with a 2, 3 or 5 percent tax on that revenue stream for as long as that subscription is active.
Apple could also decide that any app that’s well-suited to mobile platform usage — any kind of reservation, food delivery aggregator, quick-service restaurant app that enables mobile order-ahead or transportation services such as Uber and Lyft — should also pay a fee based on the usage of those apps on their platforms.
Maybe Apple does that by making those purchases flow through the iTunes platform or Apple Pay as the default payment button.
That certainly would be one way for Apple to juice Apple Pay usage.
At four years of age, Apple Pay is a star in a show without much of an audience, even though the number of people Apple reports with Apple Pay is increasing. That may have a lot to do with messaging people that upgrading their iOS is incomplete unless they install Apple Pay. It’s quite possible that people counted as users are installing Apple Pay because they think they have to, not because they plan to use it.
Cook said last week that Apple Pay is the leading mobile contactless player, with transaction growth that has eclipsed that of PayPal at the mobile point of sale and a growing acceptance at most of the top retailers in the U.S.
That would be a great story if people were really using Apple Pay to buy things at those merchants. Upgrading a merchant terminal to enable contactless payments, by default, enables Apple Pay acceptance but is not a guarantee of consumers using Apple Pay at those merchants to buy things. It’s not what we’ve seen over the last four years or, even more recently, in the results of the PYMNTS/Visa How We Will Pay study.
The iPhone Rope-a-Dope
The late, great Muhammad Ali beat George Foreman in the fight that will forever be known as the “Rumble in the Jungle” because he practiced being pummeled against ropes that would act as shock absorbers against Foreman’s punches the day of the match.
While everyone watching thought Ali, who went into the match as the underdog, was being creamed, he had a strategy.
He took his beating against the ropes, until he saw Foreman getting tired. He then came out swinging and won the match.
Such is the story with Apple and its slowing iPhone sales story.
Apple is taking its punches, with observers now starting to pile on, unsure of its ability to continue the winning streak the iPhone has given Apple for more than a decade.
Apple is deflecting those punches, first by making it harder to see how bad iPhone sales are, while at the same time shifting the narrative — and its strategy — to maximize Services revenue, well before the crowd thinks it’s down for the count. Then, it will come out swinging with potentially the most potent punch it has: eventually taxing all of the apps in the Apple app ecosystem in some way.
Of course, the business merits of one or any of these ideas for gunning up Services revenue by taxing the apps ecosystem could likely have some disastrous downstream effects for Apple.
But none of them are implausible, or even that far-fetched.
Apple might think it’s sitting in the catbird’s seat with 1.3 billion iPhone users who are sticky to its platform and who use all the apps — and can easily charge for using its platform.
If apps want to be part of that ecosystem and available to those consumers, Apple might tell them: tough luck — pay up or go somewhere else.
Maybe apps will rebel.
But that’s hard since iPhone users, while outnumbered by Android users, account for the majority of app usage for a lot of apps.
So, it just might work.
Unless voice-activated platforms like Alexa and Google Assistant ruin their plans.