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13 June 2012updated 08 Jul 2021 12:20pm

The problem with Apple’s plan to sell services rather than gadgets

By Jasper jackson

The usual hysteria around an Apple launch event this week took on a slightly unusual flavour. Instead of new gadgets making the headlines, it was intangible services to rent rather than own that spurred breathless tweeting from the assembled tech press in Silicon Valley.

Announced were streaming TV (Apple TV+), digital news subscriptions (Apple News+), gaming (Apple Arcade) and an achingly-flash titanium credit card (Apple Card), coming days after some slightly underwhelming hardware launches (new air pods, anyone?) that passed by with comparatively little fanfare.

Big entertainment names including Steven Spielberg, Reese Witherspoon, Jennifer Aniston and Sesame Street’s Big Bird joined Apple’s chief executive Tim Cook on stage to represent their work on the company’s big budget shows that it hopes will compete with Netflix and Amazon. Stars are common at Apple events, but here they were providing more than mere sparkle.

Apple and the many obsessive Apple watchers have billed the announcements as the company waking up to a future in which renting digital media will trump owning the solid devices it is consumed on. 

The reason for this is simple: Apple has a problem with hardware. Sales of the iPhone are not what they once were. High-end Android devices from Samsung and Huawei are providing genuine competition at the expensive end of the market, while there are plenty of options that are far cheaper than the cheapest iPhone. Most people who are going to buy an iPhone already own a smartphone of some kind. Built-in obsolescence is no longer a guarantee that the company will keep on being able to sell increasingly expensive phones.

In the last quarter of 2018, a point in the calendar that is usually lucrative, Apple reported a sales decline for the first time since 2001 – with iPhone sales alone down $9bn. That’s a big problem for the world’s most valuable publicly listed company, evidenced by Microsoft toppling Apple to take the top spot at the end of last year.

And so, the thinking goes, Apple needs to become a services company – one that goes above and beyond already successful ventures like the App Store and Apple Music.

Will its new services succeed? The money and big names that have been thrown at its TV plans are a promising sign (though the lack of diversity among its roster of auteurs and stars looks decidedly unprogressive).

The company already has a huge base of iPhone, iPad and Mac users – meaning it should be able to offer a seamless experience. Its decision to make the service available on smart TVs and other devices not yet manufactured by Apple means, in theory, it will be able to move beyond the audience of people already tied into Apple products.

In contrast, its digital news offer was deeply flawed on arrival, not least because of its terms. Apple is taking half of the $9.99 monthly fee and sharing out the rest based on how much time people spend with each publication. The US’s two most prominent newspaper brands, the New York Times and Washington Post, have stayed well clear, and the reception in Europe doesn’t look likely to be any warmer.

The mobile games market is healthier than digital news. But it’s difficult to see what revolutionary leap forward Apple Arcade offers, and the service seems paltry in comparison to Google’s plans for delivering streamed console-level gaming to any Chrome browser.

The credit card? Who knows. The US banking system is notoriously behind the times. While the sheer bling of the titanium card might draw in fanboys, in Europe and Asia there are already plenty of high-tech options for paying and managing finances.

But the key thing to remember about all of these services is that even if they are a huge success, it will be very difficult for them to eclipse the thing Apple is known for – beautiful hardware. The company’s revenue from services rose to more than $10bn at the end of last year, but that was still only 16 per cent of its total.

Services are growing rapidly, and may be the key to keeping the company’s sales ticking upwards. They should also help achieve the purpose of Apple’s previous ventures into services – stopping iPhone, iPad or Mac owners from thinking about ditching their hardware for a different brand. Yet it will be a long time – if ever – before Apple services are as valuable to the company as the physical goods that are seemingly no longer in vogue.

More fundamentally, the one advantage Apple has over its competitors in areas like TV, gaming or even credit cards is that many, often wealthy people already own gadgets stamped with Apple’s logo, and have at some point handed over their payment details when using the App store or Apple Music.

Without this information and difficult to escape ecosystem, Apple’s latest venture would be a story of one company with a lot of cash challenging established players such as Netflix or Spotify (the latter is incidentally suing Apple over what it says is unfair treatment on the App Store). But even with all this, it is the hardware that leads to the software, rather than the other way around.

The foundation of the company’s sales over the last decade was the iPhone. Apple didn’t invent smartphones, but it came to define them. Yet the company is too late to the party to pull of the same trick in TV or gaming. And that means the Apple’s bottom line will still remain the hardware you can touch – rather than the services you consume.

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