Why Apple Wants You to Spend More on Apps and Services

Tim Cook during a presentation

Tim Cook during a presentation | Stephen Lam/Getty Images

The iPhone may be the most recognizable smartphone on the market, but it’s not without its problems. The latest headache for Apple? The company’s latest financial results revealed that iPhone sales have fallen for the first time since the 2007 debut of the original iPhone. And as Tom Simonite reports for MIT’s Technology Review, the announcement also reveals that Apple will try to get you to spend money on apps, movies, books, and other services via the iOS device or Mac you already own.

While iPhone sales declined, the “services” section of its earnings showed a lot of promise. Arjun Kharpal reports for CNBC that Apple’s services — which include products like Apple Pay, Apple Music, iTunes, and the App Store — are now the second-biggest segment in terms of revenue and outstrips both iPad and Macs. So in the future, it seems like a safe bet that Apple is going to focus on getting its current user base — 1 billion users on the iPhone, iPad, Apple TV, Apple Watch, Macs, and iPods — to spend more on money-making services like the App Store, iTunes, and Apple Pay.

Simonite notes that Apple only began breaking out services revenues for investors at the beginning of the year, at which time chief executive Tim Cook noted that Apple’s is “one of the largest services businesses in the world.” But Apple’s revenue hasn’t traditionally relied on services, where the company faces strong competition from Google, Amazon, Microsoft, and Facebook. Some Apple services, like Apple Maps, MobileMe and its successor iCloud, and Apple Music have been criticized as failing to meet the high standards that Apple sets for its hardware.

Many users think that Apple’s apps are lacking compared to competing services. In fact, there are plenty of stock iOS apps we’d replace with more capable and customizable third-party apps. Recently, it’s been suggested that because Apple doesn’t have a division dedicated to services, it’s difficult for the company to build and improve such services as well as companies like Google or Amazon can.

But Simonite notes that Apple “clearly has enough talent and money to make a very serious attempt at improving its services and inventing new ones.” In fact, the company has recently hired talent in artificial intelligence, an area that’s crucial to the success of many of Google’s most impressive services and underpins the abilities of Alexa, Amazon’s voice-operated home assistant.

While Apple might start pushing you to spend more on its services, you’ll also likely see some great benefits from Apple’s new focus on its services. Better apps and services on the iPhone and Apple’s other devices could make them more useful, and more competitive apps from Apple could push Google and Apple’s other competitors to work harder on innovating in their own services.

However, there may also be some downsides to Apple’s renewed focus on its apps and services. As Simonite notes, “Apple and Google have sometimes opted to erect barriers to compatibility between their competing services. Apple won’t let you set Google Maps as the default mapping application on an iPhone, for example.” He posits that because finding ways to lock users in to specific services, or making it difficult for them to switch to an alternative from a competitor, is one way that companies can protect revenues from a services business. Apple may turn to such a strategy in the coming quarters if it feels the need to protect its services from competition.

As Ben Thompson writes on his blog Stratechery, making more money from pre-existing customers is the natural next step in Apple’s growth. But in Thompson’s assessment, Apple will encounter significant challenges along the way. He posits that simply having iPhone customers doesn’t mean that Apple is necessarily well-equipped to offer those customers compelling apps and services.

For instance, Apple’s “internal rhythms and processes” are organized around delivering as perfect a product as possible at a specific time — the opposite of what’s necessary for delivering and continually improving services. Apple’s integrated approach to its hardware is unworkable when it comes to software, and the company will need to reassess its usual business model in trying to make a profit from its services, since the most profitable services make money through volume, not through high margins. Thompson explains that Apple struggles with services not because “the company is incompetent, but rather that the company is brilliant — brilliant at making devices, which require completely different business structures and incentives.”

Thompson reports that Apple’s App Store policies undermine the business model of sophisticated and exclusive apps, Apple Music is succeeding primarily because of its tie-in with Apple’s hardware and not the merits of the app itself, and the company’s cloud services are “at best a source of irritation and at worst very worrisome from a security perspective: little things like constantly being prompted to enter one’s password are not only annoying but also corrosive when it comes to what should be a healthy skepticism about sharing the keys to your life.” The problem, in each case, is that Apple isn’t set up to excel in these areas.

Apple hasn’t had to be accountable for these problems, since people will still use the App Store, Apple Music, and iCloud because the iPhone is such an excellent product. Apple Pay, HomeKit, and Siri have great potential, but are struggling to deliver — a problem that will likely persist unless Apple fundamentally changes the way it approaches its services businesses.

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