For most of the past decade, the story of Apple Inc. has been the story of the iPhone. Yet in that time, Apple has learned a neat trick: how to get roughly 1 billion iPhone owners to fork over money for a strategically expanding number of non-iPhone products and services.
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The iPhone company has become the devices, wearables, services, accessories, payments, finance, and experiences company.
This diversified moneymaking approach is crucial because there are fewer and fewer people on Planet Earth who have yet to buy into Apple’s ecosystem, but still want and can afford its products.
Of course, Apple will continue looking for new iPhone buyers and, as Chief Executive Tim Cook has often signaled, it will eventually need a successor to the iPhone. Meanwhile, Apple will also have to stay on the right side of regulators, and its own developer partners, even as it grows ever larger.
The number of people buying their first new iPhone has declined every year since its peak in 2016, when there were 129 million of them, according to calculations by independent Apple analyst Neil Cybart. In 2019, the number was 48 million, and it continues to decline. Yet during last holiday season Apple experienced record-high quarterly revenue.
This can be explained in two stats. First, quarter after quarter, Apple continues to report increasing growth in services revenue, which hit $13.3 billion—or 23% of its total revenue—in the quarter ending March 28. This includes iCloud, Apple Music and TV subscriptions, commissions on app sales, payment from Google to be Safari’s default search engine, and the like.
This is money Apple makes from people using devices, not buying them. On the eve of Apple’s yearly Worldwide Developers Conference, which the company is holding as an entirely virtual event for the first time next week, Apple’s lucrative relationship with its developer community has never been more vital—or more tempestuous.
With a cratered global economy, fewer people might be buying phones, says Patrick Moorhead, president of the technology research firm Moor Insights & Strategy. Apple noted in its last earnings call that people are already holding on to their iPhones a bit longer, and the company has for some time been using lower prices to convince its customers to upgrade.
Analysts at Goldman Sachs have projected that those who do buy iPhones will likely go for the cheaper models, further depressing the all-important average price of an iPhone sold by Apple. That blow could be softened as long as everyone with an iPhone keeps spending on other things: All those AirPods and Apple Music subscriptions—especially because Apple’s accessories and services have larger profit margins than its high-end hardware.
The second stat explaining Apple’s continued growth is the number of active Apple devices in the world. Every year, that number goes up by about 100 million. These include iPhones, iPads, Macs, Apple Watches, Apple TV boxes, and even the poorly selling HomePod speakers, but not AirPods, which can’t independently connect to the internet. In 2016, there were a billion active Apple devices. Now, Apple reports 1.5 billion. About two-thirds are iPhones, says Mr. Cybart.
Of approximately 1 billion iPhone users, roughly half own only an iPhone and no other Apple devices, estimates Mr. Cybart. This group of people, often recent iPhone owners outside the U.S., represent fertile ground for Apple to continue growing its services revenue and sales of non-iPhone devices.
In Apple’s most recent earnings call, Chief Financial Officer Luca Maestri said that the company sold $6.3 billion worth of “wearables, home and accessories”—which include AirPods, the Watch and HomePod—and that 75% of Watch sales that quarter were to first-time buyers. Apple has said this category by itself is now as big as “a Fortune 140 company,” which would mean it generates around $22.5 billion in revenue a year.
Getting iPhone owners to buy bigger-ticket Apple products—for instance, a laptop—requires Apple to do something it hasn’t in a long while: prioritize the Mac. In the PC market, Apple “hasn’t really gained any market share since the MacBook Air,” says Mr. Moorhead.
If, at this year’s WWDC, Apple announces that it is moving some of its MacBooks onto its own ARM-powered chips and away from Intel’s, it could be a way Apple uses vertical integration to make its notebooks more attractive to potential switchers from Windows.
By saving money on the central processor—Mr. Moorhead estimates that could mean $150 a notebook—Apple could add features such as cellular connectivity, enhanced graphics, or even novel sensors and processors now found only in iPhones. Apple could also give these notebooks the ability to run a vast library of existing iPad apps. Apple might finally get above its roughly 7% share of global PC sales, says Mr. Moorhead.
Another lever Apple can pull with its most dedicated iPhone owners is an offer to finance the purchase of its products. On June 15, the company announced 0% financing for Apple products—if they’re purchased with an Apple credit card. (Any fees incurred would also drive up Apple’s services revenue, of course.)
While the company won’t admit it, it behaves like it knows its pool of new customers is thinning. Take the iPhone SE, launched in mid-April. It costs half what a new iPhone typically costs but has some of the internals of Apple’s latest models. It is aimed at new customers in emerging markets, though it could also attract those iPhone owners who have been reluctant to upgrade.
Before the current economic shock, the global middle class was set to grow by 160 million people a year through 2030, according to the Brookings Institution. Over three billion people already qualify, with geographically adjusted incomes between $11 and $110 a day. Most can’t afford Apple’s flagship iPhone 11, which starts at $700, much less its $1,450 top-of-the-line model. In India, for example, the average smartphone goes for $180. The $400 iPhone SE isn’t that cheap, but it might be more affordable to tens of millions more people.
The biggest liability of Apple’s current strategy is that even though the company is now less reliant on making money from the sale of every iPhone, the iPhone is still at the core. If the iPhone should lose market share, the engine of Apple’s success could sputter to a halt, or even be thrown into reverse. This could happen either because it is disrupted by some new technology from a competitor, or because millions of people can no longer afford the iPhone on account of the global economy, even at the price of an SE.
Apple’s evolving business model presents another potentially critical vulnerability: A growing list of opponents—including European Union regulators and tech companies like Spotify Technology SA, Tile Inc. and Basecamp LLC—are claiming Apple uses its dominance to charge unfair prices and suppress competitors. While Apple never dominated global smartphone market share, it does dominate its own device ecosystem. The more Apple tries to drive growth by leveraging it, the more abusive it could appear.
“It’s disappointing the European Commission is advancing baseless complaints from a handful of companies who simply want a free ride, and don’t want to play by the same rules as everyone else,” Apple said in a recent statement. “We’re deeply proud of the countless developers who’ve innovated and found success through our platform.”
Apple further defends itself against claims that it abuses its tight control over its own platform by insisting that it can hardly be a monopoly when Android has the lion’s share of the global smartphone market. It has also recently trumpeted that the App Store has made possible more than half a trillion dollars of sales and subscriptions for companies other than Apple. Finally, the company has pointed out that 84% of the apps on its App Store pay Apple nothing.
Even at its enormous size, Apple has figured out how to continue to grow, by vertically integrating, tempting us with more devices, accessories and apps, and selling lots and lots of phones, albeit at a lower margin. But it can’t do it alone: The golden goose depends on the cooperation of software and content partners, regulators—and more than a billion loyal customers.