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Apple Business Strategy Essayshark

If you ask Apple CEO Tim Cook what aspect of Apple's business investors should be paying more attention to, it's Apple's services business.

Apple's services business, comprised mainly of Apple's App Store and subscriptions like Apple Music and iCloud, is now the second-largest line on Apple's income statement with quarterly revenue of $7.3 billion, after the iPhone.

"Over the last 12 months, our Services business has become the size of a Fortune 100 company, a milestone we've reached even sooner than we had expected," Cook said during Apple's earnings conference call earlier this week.

As a sign of how much services means to Apple, the company added a line about it to its official business strategy included in an SEC filing on Wednesday.

"The Company believes ongoing investment in research and development ("R&D"), marketing and advertising is critical to the development and sale of innovative products, services and technologies," Apple wrote in the filing.

Previously, the word "services" was not included in that sentence.

Apple's description of its business strategy does not change drastically from quarter-to-quarter. Apple's description has stayed largely the same since 2014, with minor updates, mostly to the names of products.

Apple also added a mention of services to an paragraph about Apple's research and development expenses in the same filing.

"The Company continues to believe that focused investments in R&D are critical to its future growth and competitive position in the marketplace, and to the development of new and updated products and services that are central to the Company's core business strategy," Apple wrote in the filing.

Apple's services business, largely driven by the 30% cut Apple takes when people buy apps and in-app purchases from its App Store, is seen as critical for the company as iPhone sales growth has slowed in recent years. People are hanging onto their iPhones for longer, and there isn't as much room to expand as there was a few years ago.

So, services represents a critical opportunity for Apple to make more money from its existing base of customers.

Widely-followed technology analyst Ben Thompson wrote on Thursday that it appeared as if Apple's attempts to lock its customers into its own services was "steadily increasing."

He writes:

Indeed, Apple's attempt at services lock-in is steadily increasing: HomePod supports only Apple Music and Siri, CarPlay supports only Siri and Apple Maps, iOS still doesn't let one change default applications. None of these decisions are based on delivering a superior experience, the key to Apple's differentiation with a hardware-based business model; all are based on securing an ongoing relationship with the company that can be monetized over time.

But Apple's new insistence that R&D spending include services suggests the company knows it needs to deliver new services that are worth paying for — perhaps, something like the internet-TV subscription it's been rumored to be considering for years.

Or, Apple could also introduce new products under the iCloud banner beyond cloud storage — perhaps something dealing with security and identity, or something else that takes advantage of Apple's tight integration of software and hardware — something Cook says only Apple can do.

Regardless of what happens with Apple's services, investing in it through research and development and advertising is now part of Apple's official business strategy.

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A few years before Sony co-founder Akio Morita passed away, I had a chance to interview him about his decision to buy a movie studio. He told me that to him, “movies and music are just content,” and Sony wanted to own content for its devices.

Morita’s way of thinking had a great deal of influence on Steve Jobs, the late CEO of Apple, who held Morita in high regard. In fact, I believe it served as the base of Jobs’ strategy for Apple, particularly after he rejoined the company in 1997 and went on to oversee projects like the iPod and the iPhone.

The content-first approach is still evident in Apple’s decision making today. You have to understand something about Apple: Ideologically speaking, it’s an operating system and user interface company first, hardware company second — and user interfaces are a form of content.

Don’t get me wrong. Hardware is critical to Apple, accounting for the vast majority of the company’s revenue. But for Apple, hardware is simply a vehicle for delivering its other creations, like user interfaces, apps and services (the lattermost of which is an important source of growth for the company.) Taken together, these components power a rich cross-platform experience that allow Apple users to keep their myriad devices in sync and up-to-date.

When Apple first launched the iPhone in 2007, Phil Schiller, now the company’s senior vice president of marketing, showed me the original device. He turned it off, put it on the table and asked me what I saw. I replied that it was a block of metal with a glass screen. His reply? “It’s a piece of glass for Apple to deliver its exciting new software.”

I remember the conversation well, because it has shaped my understanding of the company ever since. As Apple sees it, the iPhone is a blank canvas on which it can paint. Of course, all hardware is a “blank canvas” to some degree. But none of Apple’s competitors can deliver the level of continuity across devices that it can. The Android world in particular suffers from terrible bifurcation, exacerbated by the myriad hardware and software versions available.

We all know how Apple disrupted the PC market with the Mac, introducing the graphical user interface and mouse to a wide audience for the first time. We also know how it disrupted the music industry with the iPod, and the communications world with the iPhone. The iPad, meanwhile, set off further disruption of the PC world. All of that hardware had one thing in common: Powerful hardware, yes, but more importantly, a user interface, apps and services that people loved, or still love.

It’s also instructive to look at the Apple TV. When it was introduced in 2006, it was labeled a “hobby.” But since then, it has sold tens of millions of units, and Apple has lately shown renewed interest in improving the product. Sales aside, the device also helped Apple make progress on its longtime quest to reinvent television. Before he died, Jobs famously told biographer (and former TIME editor) Walter Issacson that he had “cracked” television. Jobs probably envisioned an actual television set, and rumors of Apple making one never seem to die. But the Apple TV set-top box offers an undeniably simpler interface compared to most TVs. And like Apple’s other hardware, it’s simply a user interface using a TV as a “blank canvas.” (Apple is also funding original programming and is reportedly interested in creating a “skinny bundle” of video content for Apple users.)

Meanwhile, Apple’s new cross-platform TV app is an attempt to create a platform that delivers video on every screen in Apple’s arsenal, all with a simple interface, voice control and cloud features. Instead of making a standalone TV, Apple is simply turning its existing gadgets into part-time TVs. As my friend Benedict Evans of venture capital firm Andreesen Horwitz recently tweeted:

So Apple’s playbook is actually pretty predictable: Hardware devices serve as a blank canvas for Apple to deliver its user interface, apps and services, which are the company’s true crown jewels. If there’s any mystery in the strategy, it’s only in the kinds of blank canvas it decides to make.

Tim Bajarin is recognized as one of the leading industry consultants, analysts and futurists, covering the field of personal computers and consumer technology. Mr. Bajarin is the President of Creative Strategies, Inc and has been with the company since 1981 where he has served as a consultant providing analysis to most of the leading hardware and software vendors in the industry.