A new expansion of the Walled Garden
When Apple launches new products and services, it rarely focuses much attention on all the work required behind the scenes. This creates the illusion that such product launches are easy, just something that a corporation threw together based on a checklist of necessary features.
Most of the criticism directed at Apple niggles with what those features are, without much thought to what would be involved with “adding” something as “simple” as, say, native Spotify integration with HomePod, some legacy ports, or some other massive effort that’s easy to dream up as a “missing feature.”
Apple’s launches also create the illusion that any other company could just throw money at the same problem and get the same results. That clearly didn’t occur with Samsung’s Milk or Galaxy Gear; Microsoft’s PlaysForSure, its purchase of Nokia or its Surface hardware; Google’s various TV box offerings, its acquisition of Motorola, its attempts at building tablets or notebooks; or the entire industry’s consortium to develop digital video distribution services such as UltraViolet downloads or Miracast streaming. Doing anything big is actually extremely hard.
Looking back on Apple’s recent history in television, it’s clear that a lot of invisible efforts are required to build attractive and sustainable solutions. There are few initiatives that Apple has worked on that have fizzled, such as iTunes LP and Extra, its digital answers to DVD bonus content and the “enhanced CD” with video clips which never really took off.
However, the threads that Apple keeps pulling in television are overall establishing a very successful expansion of the Walled Garden that Apple first created to make iTunes’ commercial music and movies available as “audio-visual software” for Macs and then iPods, and then the App Store market that launched native software titles for iPhones and later iPad.
Services are a subscription to sell hardware
While pundits keep forwarding the idea that Apple is giving up hardware to simply become a Netflix, the reality is that Apple’s expanding efforts to make AirPlay 2, Apple Music streaming and iTunes movie downloads available on partner hardware from Samsung TVs to Alexa WiFi microphones is part of a strategy where Apple TV, HomePod and iPads all get a greatly expanded ecosystem to thrive in. Subscription software is a killer app that keeps killing.
Rather than giving up hardware for Services—as the dumbest hot takes suggest—Apple is reducing its dependence on unit sales of digital downloads and increasingly moving to a subscription model for audio, video, applications, and games—specifically with the intent to sell more hardware.
Apple clearly thinks people will use AirPlay 2 and subscription content on a variety of devices once they get a taste
Apple has already largely migrated iTunes from download sales to Apple Music’s subscription streaming. Those efforts to shift the company’s legacy iTunes downloads into a subscription model is seldom appreciated as an example of astute adaption to change. However, Apple has rapidly turned around its huge ship in same the way that Microsoft had to scramble to attach a web browser to Windows to keep control of the PC desktop in the 1990s. It was pivot or die, and Apple has survived stronger than ever.
Spotify, a company that was claiming the most music streaming subscribers globally and crowing that it does business on platforms the tech media likes to describe as “dominant,” is suddenly crying that Apple Music and the Apple Store is a “monopoly” and that it needs governments to intervene on its behalf to force Apple to serve its interests for free.
That speaks volumes about the success Apple is seeing in making its shift from downloads to subscriptions. It also says something really unflattering about Spotify’s ability to find customers on its own and the supposed “dominance” of Android and Windows as computing platforms.
Oddly enough, the same pundits who squawk about Apple Music being the end of HomePod are hopeful that Spotify will soon learn how to navigate the consumer electronics hardware market and figure out how to sell a new device that helps to sell Spotify as a service. It’s like they don’t even read their own work.
Subscriptions better support software development
While subscription streaming royalties don’t deliver nearly the same revenues as music downloads or CDs for artists, subscription software appears to be working out really well for developers.
Adobe and Microsoft have both shifted their massive software business to subscription models, and the result has been dramatically successful. It has created reoccurring revenues that support ongoing development in a model that’s far more healthy—and sane—compared to big, expensive marketing releases every couple years that have to focus on fancy features to woo software suite purchases.
Microsoft’s Office 365 is now an App Store subscription
Rather than Adobe trying to hype up the Healing Brush as the reason to pay for an all-new Photoshop, or Microsoft having to refresh the UI of Office with the Ribbon just to push more boxes out the door, both software houses can focus on what they know to be actual, incremental improvements and deliver these as soon as they’re ready.
It’s also working out well for small developers, who can work on new titles and app functionality rather than focusing on sales and marketing—or running into the situation where their customers expect perpetual free app upgrades without ever paying for any of that work.
Subscription software is effectively the best way to pay for software because it keeps subscribers up-to-date on the latest tools without needing to regularly sell them on buying each new iteration. You just have to sell users on an ongoing subscription once and then keep them happy with it.
Apple and the Subscription OS
While Microsoft convinced the world back in the 1990s that the best way to sell software was to monopolize the market and sell big monolithic packages, its business was really created and sustained by Windows’ invisible tax that was slapped on PC boxes. When people bought new PCs, they effectively got Windows “for free” because it was being paid for by the PC licensee. That effectively blocked any competition for alternative PC operating systems like OS/2, NeXT, BeOS or Linux.
Everyone in the tech media could only see that Microsoft was also selling standalone Windows retail boxes, and implored Apple to follow the same model of charging money for its Mac system software. That was dumb advice that didn’t work out well at all.
With the introduction of the iPhone in 2007, Apple made iOS free and promised regular updates to deliver features that wouldn’t cost extra down the line. In 2009 Apple slashed the price of macOS upgrades from $129 to just $29 for Snow Leopard, then later to $19 on Mountain Lion, and finally began shipping new updates for free starting with 2013’s Mavericks. As with Windows PCs, the price of the OS was now hidden in the development costs of Macs.
With Mavericks, Apple turned macOS into, effectively, a free software subscription
Mac and iOS buyers effectively get a subscription to several years of OS updates by paying a premium for Apple hardware. So Apple effectively pioneered the “healthy and sane” approach to subscription software upgrades with macOS, iOS and its other OS platforms. It also began bundling significant software packages with new hardware, and these are also updated for free: Pages, Keynote, Numbers, iMovie, GarageBand and so on.
Apple has also seen success in selling online services under the iCloud brand, which provides cloud storage, backup, cloud sync and a variety of other services all bundled into an ongoing fee. Services is now Apple’s fastest-growing segment in revenues, outpacing the growth of both Macs and iPads. Yet Services aren’t coming at the cost of hardware sales; they are clearly driving new hardware sales.
In fact, the hardware that gains value from paid or free Services subscriptions (Apple Music, iCloud, OS updates, iWork) is what Apple is selling best. Hardware that doesn’t really benefit from content or OS subscriptions have largely been discontinued (AirPort routers, printers, displays, webcams).
One of the biggest potential hardware beneficiaries of these subscription models is Apple TV, iPad, and HomePod, all of which become more useful when you have subscription content to play on them. And once you are getting subscription content, you have more reason to buy additional Apple hardware to use with it, as the next segment will examine tomorrow.